1

Reportable

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

Civil Appeal Nos. 2748-49 of 2022

The State of Maharashtra .…Appellant

Versus

63 Moons Technologies Ltd. …Respondent

And With

Civil Appeal Nos. 2750-51 of 2022

2

J U D G M E N T

Dr Dhananjaya Y Chandrachud, J

Contents

A. Facts ............................................................................................................ 3

B. Submissions ............................................................................................. 17

C. Analysis ..................................................................................................... 25

C. 1 Framework of the MPID Act ................................................................... 25

C. 2 Framework of NSE .................................................................................. 27

C. 3 Definitions of „Deposit‟ and „Financial Establishment‟: Interpretation

of Section 2(c) and 2(d) of the MPID Act ...................................................... 40

C. 3.1 Settlement Guarantee Fund: Deposit under Section 2(c) of the

MPID Act ....................................................................................................... 46

C. 3. 2 Receipt of commodities: Deposit under Section 2(c) of the Act . 49

C.4 Uncovering the Conspiracy .................................................................... 55

C. 4.1 The Grant Thornton Report .............................................................. 55

C. 4. 2 63 Moons Judgment ........................................................................ 56

C. 5 Constitutional Validity of the MPID Act ................................................. 65

C. 6 The High Court‟s Judgment ................................................................... 71

PART A

3

1 The appeal arises from a judgment dated 22 August 2019 of the Bombay

High Court, by which certain notifications attaching the property of the respondent

under Section 4 of the Maharashtra Protection of Interest of Depositors (in

Financial Establishments) Act 1999

1

have been quashed. The respondent holds

99.99% of the shareholding of National Spot Exchange Ltd

2

. At the core of the

dispute is whether NSEL is a ‗financial establishment‘ within the meaning of

Section 2(d) of the MPID Act.

A. Facts

2 NSEL is a company incorporated under the Companies Act 1956, and is a

wholly owned subsidiary of Financial Technologies (India) Limited, which is now

known as 63 Moons Technologies Limited

3

. On 5 June 2007, the Union of India

issued a notification under Section 27 of the Forward Contracts (Regulation) Act

1952

4

exempting forward contacts of one-day duration for sale and purchase of

commodities traded on NSEL from the application of the provisions of the

enactment. NSEL started operating as an exchange for spot trading in

commodities. NSEL launched contracts for buying and selling of commodities on

its trading platform with different settlement periods, ranging from T+0 to T+36

days. ‗T‘ indicates the trade date, that is the date on which the trade took place

and +0 or +36, indicates the number of business days after the trading day when

the delivery of the commodity and the payment of price is made.

3 NSEL offered ‗paired‘ contracts. Such contracts enabled traders either by

themselves or through their brokers, to simultaneously enter into paired

1

“MPID Act”

2

“NSEL”

3

“FCIL or 63 Moons”

4

“FCRA”

PART A

4

contracts, such as of T+2 and T+25 duration. The seller through his broker puts

the commodities on sale and the buyer through his broker looks to purchase

commodities of specific requirements. NSEL then pairs the buyer and the seller if

there is a match between the requirement of the buyer and the available

commodities with the seller. The buyer and the seller simultaneously enter into

T+2 and T+25 contracts. For example, if ‗A‘ (the buyer) wants to buy one ton of

basmati rice, he would trade on NSEL‘s platform through his broker. The platform

would identify that ‗B‘ (the seller) has an offer to sell the quantified commodity.

NSEL would then match both the contracts. The date of matching of the contracts

is termed as the trade date or ‗T‘. ‗A‘ must then pay the price of the commodity to

NSEL, which checks if ‗B‘ has deposited the stock in a warehouse accredited to

NSEL for delivery within two days. Once NSEL has confirmed that ‗B‘ has

deposited the stock in the warehouse, it transfers the money to ‗B‘.

Simultaneously, the same parties enter into a T+25 contract by which ‗A‘ (who

was the buyer in the T+2 contract) would sell the same quantity of commodity

purchased to ‗B‘ (who was the seller in the T+2 contract). The difference between

the purchasing cost and the selling cost is the profit that the trading member

acquires through the trade. A flow chart indicating a representation of the

transaction is set out below:

PART A

5

T+2

Commodity Seller

NSEL

Broker

T+25

Investor

Commodity Seller

NSEL

Money is transferred

from NSEL’s settlement

account to seller’s

settlement account

Deposits commodity in

NSEL accredited

warehouse

Money is transferred

from broker’s

settlement account to

NSEL’s settlement

account

Issues warehouse receipt

and displays it on

exchange terminal

Pay money to brokers

Places order on behalf of

investor for purchasing of

commodity

Sells back the same

commodity purchased on

T+2

NSEL pays the commodity

seller

The seller’s broker pays

NSEL for the sale of

commodity

PART A

6

4 A detailed step-wise trading process of the paired contracts is indicated

below:

(i) A trading member of NSEL who wishes to trade in the platform is

required to place a specific quantity of the commodity in a warehouse

accredited to NSEL. The warehouse would then generate a warehouse

receipt;

(ii) The registered trading member or his broker who had placed his

commodity in the warehouse could on the basis of the standard

proforma contracts offered by NSEL place offers for sale of the

commodity on the platform, stipulating the price and quantity offered;

(iii) The buying trading member or his broker would input buy orders of a

particular commodity and quantity on the NSEL trading platform;

(iv) When a sale offer and a buy offer coincide, the exchange would be

matched by NSEL, stipulating the commodity, the price, and the

quantity;

(v) The Exchange would communicate all the trades effected at the end of

the day;

(vi) On the next day, an obligation report recording the pay-in and delivery

obligations would be forwarded to the trading members;

(vii) On the day after (that is, settlement date), NSEL would debit the

trading member‘s designated settlement account for the amount of the

buying member‘s pay in obligations and it would be credited to NSEL‘s

exchange settlement account. NSEL‘s Operations Department would

inform NSEL‘s Delivery Department of the selling member‘s delivery

PART A

7

obligations. Based on the intimation, NSEL‘s Delivery Department

would confirm to the Operations Department if the requisite quantity of

the particular commodity is available according to the Warehouse

receipts. After such confirmation, the Operations Department would

release the purchase price to the selling broker‘s designated bank

account. Simultaneously, a Delivery Allocation Report would be issued

to the buyer‘s broker or the buyer informing him that the commodity

purchased was allotted to him; and

(viii) NSEL would then send the buyer‘s details to the selling trading

Member and the selling trading member would arrange for the non-

member client/seller to generate a VAT paid sale invoice of the

commodity. On the basis of the Delivery Allocation Report and the VAT

Paid Invoice, NSEL would issue a Delivery Note authorizing the buyer

to take delivery from the designated warehouse. If the buyer choses to

not take delivery, he would be put in constructive possession of the

commodity where he would be entitled to take possession at any time.

5 On 27 April 2012, the Department of Consumer Affairs

5

issued a show

cause notice to NSEL on why action should not be taken against it for permitting

transactions in violation of the exemption notification. On 12 July 2012, the DCA

directed NSEL to give an undertaking that no contracts shall be launched until

further instructions, and that all existing contracts must be settled on the due

dates. In July 2013, about 13,000 persons who traded on the platform of NSEL

claimed that other trading members had defaulted in the payment of

5

“DCA”

PART A

8

approximately Rs 5,600 crores. NSEL issued a circular on 31 July 2013

suspending its spot exchange operations. It stated that the delivery and

settlement of all pending contracts would be merged and the contracts would be

settled after the expiry of 15 days. NSEL published a statement on 6 August 2013

representing that it had sufficient stocks valued at Rs 6,032 crores in its

warehouses. A new pay-in schedule was announced by NSEL on 14 August

2013 by which the Exchange commenced the pay-in schedule from 16 August

2013 and pay-out schedule from 20 August 2013, in the same manner every

week. It was also represented that the members would be entitled to get simple

interest on their outstanding dues with effect from 16 August 2013 on a reducing

balance at 8% per annum till the end of the settlement calendar. The notification

is extracted below:

―National Spot Exchange Limited

Circular

August 14, 2013

Settlement Schedule

In terms of the provisions of the rules, Bye-Laws and

Business Rules of the Exchange and further to circular

no. NSEL/TRD/2013/065/ dated July 31 2013, the

Members of the Exchange are hereby notified that the

Exchange has finalised the following revised schedule for

settlement of outstanding dues payable to the members.

This schedule has been prepared taking into account the

exigencies emerging from sudden closure of trading

operation, liquidity problem accentuated by withdrawal of

buyers credit limits by the banks from the members, who

are in pay in and the extensive discussion done by the

members who have to complete pay in and members

who have to receive the payments. Considering the

challenges, the revised schedule of settlement has been

prepared to ensure reduction in payment rist and meet

the settlement obligation:

1. The Exchange will commence the Pay-in schedule from

Friday, the 16

th

August, 2013 and pay-out from Tuesday,

the 20

th

August, 2013 and thereafter in the same manner

every week.

PART A

9

2. The Exchange shall effect pay out on a pro-rata basis

every week based on the money recovered as per the

settlement calendar attached herewith. These payments

are subject to realization of cheques of the members,

who have to complete pay-in. In case any payment is not

realised, then the Exchange shall take measures as per

its Rules and Bye laws.

3. All funds realized up to Friday every week starting from

August 16, 2013 shall be disbursed on Tuesday of the

subsequent week.

4. The schedule has taken into account all promised or

expected payment from the members, who have given

post-dated cheques or letters of commitment.

5. Members/clients shall be entitled to get interest on their

outstanding dues with effect from 16

th

August 2013 on

reducing balance method, based on simple interest rate

of 8% per annum till end of settlement calendar. Interest

amount shall be paid at end of the settlement.

6. A detailed settlement Calendar is being enclosed

herewith.

For and on behalf of

National Spot Exchange Ltd.

Santhosh Mansingh

Asst. Vice President‖

6 By a Notification dated 19 September 2014, the Central Government

withdrew the exemption granted on 23 July 2008. The Forward Markets

Commission

6

recommended to DCA that steps be taken to ascertain the quantity

and quality of commodities at accredited warehouses, the financial status of

buyers and trading members, and that liability be fixed on the promoters of NSEL,

i.e 63 Moons. On 27 August 2013, FMC directed a forensic audit of NSEL by

Grant Thornton LLP. The Union of India ordered an inspection of accounts of

NSEL and 63 Moons under Section 209A of the Companies Act. The Economic

Offences Wing registered cases against the directors and key management

6

“FMC”

PART A

10

personnel of the NSEL and 63 Moons and against trading members and brokers

of NSEL under the provisions of the Indian Penal Code and the MPID Act.

7 Pankaj Ramnaresh Saraf, a Director of Vostak Far East Securities Prvt.

Ltd., a company involved in the business of investment, trading, and financing

filed a complaint

7

on 30 September 2013 against the directors and persons

holding key management posts in NSEL, 25 borrowers/trading members and

some brokers of NSEL for offences under Sections 120B, 409, 465, 468,471,474

and 477A of the Indian Penal Code 1860. The complainant stated that he had

primarily been transacting in T+2 and T+25 contracts. He further stated that since

NSEL suspended trading and deferred settlement of all one-day forward

contracts by fifteen days, he had not received payment of Rs 202 lakhs that was

due to him under various contracts. On 14 August 2013, he was informed by his

broker that NSEL had issued a settlement schedule for the payment of

outstanding dues after seven months. He alleged that the commodities were

traded by providing ‗false‘ warehouse receipts of ‗non - existent commodities‘. It

was also alleged in the complaint that NSEL held the commodities in warehouses

accredited to it as a ‗trustee‘ on behalf of the depositors (buyers) and that the

misappropriation is a criminal breach of trust. In addition to the above, he also

alleged that the Settlement Guarantee Fund

8

had been misused by NSEL.

8 The FIR was later transferred to the Economic Offences Wing

9

of Mumbai

Police. The case was registered and Sections 3 and 4 of the MPID Act were

added to the FIR. The case was transferred to the Special Court constituted

7

FIR No 216 of 2013

8

“SGF”

9

“EOW”

PART A

11

under the MPID Act.

10

NSEL filed a writ petition challenging the invocation of the

MPID Act on the ground that the exchange is not a ‗financial establishment‘ under

the provisions of the Act. By an order dated 1 October 2015, the petition was

dismissed by a Division Bench of the High Court on the following grounds:

(i) The material collected by EOW during the course of the investigation

revealed that NSEL did not carry out its exchange operations according

to the bye-laws. It was prima facie evident that NSEL represented to

the traders that they would be provided security free loans and that

they would receive fixed returns of 14% to 16% pa;

(ii) The record indicates that the transactions were not accompanied by

physical delivery of goods. In many cases, the accounts of NSEL and

the suppliers of the goods did not tally. The record also indicates that

there were multiple accommodation entries due to collusion between

NSEL and the trading members;

(iii) Section 2(d) of the MPID Act defines ‗financial establishment‘ as any

person accepting any deposit under a scheme. Section 2 (c) of the

MPID Act provides an inclusive definition of the term ‗deposit‘. Since

NSEL assured the traders that their investments in paired contracts

would secure them a return of 14 to 16% pa, the receipt of the returns

would prima facie fall within the definition of ‗deposit‘; and

(iv) A charge-sheet and supplementary charge-sheets have been filed.

NSEL has an alternative remedy of applying for discharge before the

trial Court.

10

The case was registered as MPID Case 1 of 2014

PART A

12

9 The State of Maharashtra issued a notification on 21 September 2016

under Section 4 of the MPID Act by which the properties of the respondent were

attached. The relevant extract of the notification is reproduced below:

―No. MPI 2016/C.R.541/B/Pol II:- Whereas complaints

have been received from number of depositors against

M/s La-Fin Financial Services Pvt. Ltd. and M/s La-

Financial Services Pvt. Ltd. (hereinafter referred to as

―the said Financial Establishment‖) complaining that they

had collected the Fund and have defaulted to return the

said deposits made by the depositors , on demand;

And whereas, the State Government is satisfied that the

said Financial Establishment and its Chairman/Directors

are not likely to return the deposits to the depositors and

hence the Government has to protect the interests of the

depositors;

And whereas the properties in the Scheduled appended

hereto are alleged to have been acquired by the said

Financial Establishment and its Chairman/Directors from

and out of the deposits collected by the Financial

Establishment;

Now, therefore, in exercise of the powers conferred by

sub-Section (1) of Section 4, Section 5 and Section 8 of

the Maharashtra Protection of Interest of Deposits (in

Financial Establishment) Act, 1000 (Mah. XVI of 2000)

(hereinafter referred to as ―the said Act‖) the Government

of Maharashtra hereby attaches the properties of the said

financial Establishment and in the name of its

Chairman/Directors as specified in the Schedule.‖

10 The Supreme Court on 26 October 2016 dismissed as withdrawn, the

Special Leave Petition filed against the order of the Bombay High Court. The

appellants filed a Writ Petition before the Bombay High Court challenging the

notification dated 21 September 2016 issued under Section 4 of the MPID Act

attaching the properties of the respondent. The validity of Sections 4 and 5 of the

MPID Act was challenged on the ground that they are violative of Articles 14, 19

PART A

13

and 300-A of the Constitution. The reliefs sought in the writ petition are

extracted below:

―a. The Hon‘ble Court may declare that Sections 4 and 5

of the MPID Act are violative of Articles 14 and 19 of the

Constitution and Article 300-A of the Constitution and

consequently issue a Writ of Mandamus and/or any other

appropriate Writ, Order or Direction restraining the

Respondent Writ, Order or Direction restraining the

Respondent, its servants and/or agents from acting in

pursuance of those provisions;

b. In view of Prayer A above, issue a Writ, Order or

Direction under Article 226 of the Constitution quashing

and setting aside the Impugned Notification dated

21.09.2016 (being Exhibit-S herein) issued by the

Respondent exercising the power under Section 4 of the

MPID Act;

c. In the alternative, issue a Writ, Order or Direction in the

nature of Certiorari or any other appropriate Writ, Order

or Direction under Article 226 of the Constitution

quashing and setting aside the Notification dated

21.09.2016 as being ultra-vires Section 4 and 5 of the

MPID Act.

11 The State of Maharashtra issued further notifications dated 4 April 2018

11

,

7 April 2018

12

, 11 April 2018

13

, 19 April 2018

14

, 15 May 2018

15

and 19 October

2018

16

under Sections 4 and 5 of the MPID Act, attaching the properties of the

respondent to recover the defaulted money. The Writ Petitions were heard

together and disposed of by a Division Bench of the Bombay High Court by a

judgment dated 22 August 2019. The petition was allowed on the following

grounds:

11

Notification No. MPI/1118/C.R-394/Pol-11

12

Notification No. MPI-1118/C.R. 329/Pol-11

13

Notification No. MPI-1118/C.R. 434/Pol 11 read with corrigendum bearing MPI No. 1118/C.R.-434/Pol 11 dated

19 April 2018.

14

Notification No. MPI 1118/C.R. 4999 Pol 11

15

Notification No. MPI-1118/C.R. 597/Pol 11

16

Notification No. MPI 1118/CR 1040/Pol 11

PART A

14

(i) The pay-in amount received from the buyer was only for the purpose of

passing it over to the seller on the same date. This amount would not

fall within the purview of Section 2(c) of the MPID Act in terms of which

a ‗deposit‘ must be the receipt or acceptance of a valuable commodity

which would be ‗repaid‘ by the financial establishment after a specified

period;

(ii) NSEL only performed the role of a facilitator, in a manner similar to the

Bombay Stock Exchange. NSEL did not receive money with the

obligation to return it on maturity. The fact that VAT is collected by the

selling members from the buying members and that TDS is not

deducted by NSEL indicates that NSEL is a mere pass through

platform;

(iii) The contract notes do not disclose that NSEL received any money or

commodity with an assured return. Rather, the difference between the

buy contract and the sell contract is the profit that the member receives.

The profit from the transaction is determined by totalling the two

amounts by taking into consideration the number of days when the

commodity was sold and the pay-out was scheduled. It varies with

different products based on the period when the sell contract (that is the

second contract) is scheduled;

(iv) The entries in the ledger of the traders reflect the delivery obligation

and record the credit/debit pursuant to the trade. The entries of NSEL‘s

settlement bank account show the amount received from a particular

PART A

15

trader. The entries of pay-in and pay-out match with the ledger

accounts of individual traders;

(v) Mr. Pankaj Saraf in his FIR has not stated that he has deposited money

with NSEL. He has stated that trading on the platform was successful

until the cessation of further trades ;

(vi) The transactions had gone wrong since as depicted in the show cause

notice to NSEL, the outstanding positions of trade did not result in

delivery by the end of the day. After 31 July 2013, 24 sellers failed to

honour their part of the agreement by purchasing back the commodities

on T+25 days. This was noted as a violation of the exemption granted.

However, this does not change the fact that NSEL did not receive any

‗deposits‘ within the meaning of Section 2 (c) of the MPID Act since

NSEL did not receive the commodities or money to be retained. NSEL

only received transaction and warehouse charges which cannot be

considered as a ‗deposit‘;

(vii) EOW filed a charge sheet on 4 August 2014 in which it was stated that

the important feature of the exchange is that it guarantees that both the

parties would comply with their contractual obligations and if the trading

member is unable to pay, the Exchange would sell the goods and

recover the money. The charge sheet also notes that NSEL

encouraged the investors to enter into contracts without depositing

commodities in the warehouses. However, the charge sheet makes it

evident that even the EOW was of the opinion that the Exchange was

PART A

16

only acting as a transaction agent. Further by a letter dated 16 August

2013 from FMC, information on defaulters was sought by NSEL;

(viii) Merely because one of the brochures refers to an assured yield of 14 to

16% pa, it cannot be held that a ‗deposit‘ was made;

(ix) In the event that accounts of NSEL and the suppliers do not tally and

delivery of commodities has not been provided, this may constitute an

offence under Sections 465 and 467 of the IPC. NSEL is not absolved

of any of these liabilities;

(x) At the highest, since the members had to pay back the amounts due on

T+25 , they could be construed as a ‗financial establishment‘;

(xi) The warehouse receipts do not establish the nature of the transaction

nor can it be held that the deposit of commodities would fall within the

purview of the definition of ‗deposit‘ since the commodity that was to be

deposited in a warehouse was to be sold by the seller;

(xii) The judgment of the Supreme Court in 63 Moons Technologies v.

Union of India

17

does not have any bearing on whether the attachment

of properties initiated under Section 4 of the MPID Act is valid;

(xiii) The forensic report of the 17 defaulter companies reveals that the

defaulters have utilized the funds and have transferred them to their

sister companies;

(xiv) In another case of one of the defaulting trading members that is

pending before the Gujarat High Court, the Deputy Secretary, Home

Department, Government of Maharashtra had referred to the trading

17

(2019) 18 SCC 401

PART B

17

member as a ‗defaulter‘ who had committed offences under Sections

409,465, 467,468, 471 and 474 of the IPC;

(xv) The contention that Section 4 of the MPID Act must be read down in

view of the ‗wide ambit‘ of the provisions which could be misused is left

open since the Supreme Court in KK Bhaskaran v. State and Sonal

Hemant Joshi v. State of Maharashtra has upheld the constitutional

validity of the Depositors Acts in Tamil Nadu and Pondicherry,

specifically noting that the decision would also apply to the MPID Act

since the provisions are pari materia;

(xvi) By an interim order on 24 October 2018, the impugned notifications

attaching the properties were stayed on the ground that the attachment

was in excess of the defaulted amount. It was noted in the interim order

that the defaulted amount is Rs. 4822.53 Crores whereas the

authorities have attached properties worth Rs. 8547 Crores, including

Rs. 2200 Crores from NSEL. This order was challenged before the

Supreme Court and it has refused to interfere; and

(xvii) The audit report submitted US Gandhi and Co. has traced trade

obligations of the trading members who are defaulters. NSEL has also

instituted recovery suits against the defaulters.

B. Submissions

12 Mr. Jayant Mehta, Senior Counsel appearing for the appellant submitted:

(i) The definition of ‗deposit‘ in Section 2(c) of the MPID Act is broad and

inclusive. The provision must be interpreted widely keeping in view the

statement of objects and reasons for the enactment of the law;

PART B

18

(ii) NSEL received money from the seller and returned it in kind (through

commodities). NSEL received commodities from the seller and returned

an equivalent amount after a specified period in cash. Therefore, NSEL

accepted deposits from both the seller and the buyer;

(iii) Through a paired contract, the buying member would buy a purchasing

contract and simultaneously sell a sale contract paired by NSEL. The

sale price was pre-designated by NSEL to offer an annualised return of

14-16% to the buying member;

(iv) NSEL is both the bailee of cash (at the buyer‘s end) and of valuable

commodities (at the seller‘s end);

(v) The writ petition filed by the respondent before the High Court was not

maintainable since there was an alternative remedy of raising an

objection against the attachment of property before the Designated

Court under Section 7 of the MPID Act. Further, any person who is

aggrieved by the order of the Designated Court under Section 10 can

appeal to the High Court within 60 days from the date of the order in

terms of Section 11 of the MPID Act; and

(vi) The settlement cycle broke because:

(a) NSEL, contrary to its bye-laws and rules, did not warehouse

the commodities. The buying member did not have knowledge

of whether the commodities were warehoused; and

(b) The buying member was lured into a paired contract on the

assurance that the commodity in the warehouse would

constitute a security and NSEL would be the counter-guarantor.

PART B

19

However, NSEL colluded with the selling members and

facilitated trades without ensuring that the commodities were

deposited in the warehouses.

13 Mr. Vikramjit Banerjee, ASG appearing for the State of Maharashtra made

the following submissions:

(i) NSEL is a financial establishment under Section 2(d) of the MPID

Act since it has accepted deposits as defined under Section 2(c).

NSEL has been trading in different types of commodities through

‗farmer‘ contracts, paired contracts, e-series contracts, among

others. NSEL guaranteed assured returns to investors;

(ii) The provision of warehouse receipts along with the assurance of

returns indicates that NSEL was accepting deposits;

(iii) This Court in New Horizon Sugar Mills Ltd. v. Government of

Pondicherry

18

has held that the state legislature is competent to

legislate upon financial establishments with an object to protect

investors. The Court also held that the expression ‗financial

establishment‘ includes a natural and a juristic person such as a

company incorporated under the Companies Act. This Court has

held in KK Bhaskaran v. State

19

, State v. KS Palanichamy,

20

and

PGF v. Union of India

21

that the object of a law regulating financial

establishments is to protect the investors. Therefore, the provisions

18

(2012) 10 SCC 575

19

(2011) 3 SCC 793

20

(2017) 16 SCC 384

21

(2015) 13 SCC 50

PART B

20

of the statute must be interpreted keeping this salient purpose in

mind;

(iv) This Court in 63 Moons Technologies (supra) held that NSEL

carried out trade in paired contracts in commodities and this created

financial transactions distinct from sale and purchase transactions;

and

(v) The respondent has an alternate statutory remedy available to it

under Section 10 of the MPID Act.

14 Dr Abhishek Manu Singhvi, Senior Counsel appearing for the respondent

submitted that:

(i) The commodity sellers received money from the buyers on T+2 with

an obligation to repay the money on T+25. NSEL obtained decrees

against the defaulters. Therefore, at the highest, the appellants can

only argue that the defaulting trade members (not NSEL) are

‗financial establishments‘;

(ii) The State has characterised the member defaulters of the exchange

as ‗defaulter companies‘ and as ‗financial establishment‘ in

notifications issued by the Home Department on 31 March 2017 and

24 March 2018 which indicates that NSEL is not a defaulter;

(iii) According to the forensic report submitted by the EOW, the full

money trail has been traced to the defaulting members. NSEL did

not receive any money as ‗deposit‘;

(iv) The State of Maharashtra in a case which is pending before the

Gujarat High Court relating to one of the members (buyers)

PART B

21

submitted on affidavit that the defaulting members have defrauded

the investors;

(v) Even if the impugned judgment is upheld, NSEL will not be absolved

of its criminal liability under the IPC but no criminal liability arises

under the MPID Act. . NSEL and 63 Moons are being prosecuted in

various other criminal proceedings. They will face civil suits as well;

(vi) As against the current outstanding claim of Rs. 4,676 Crores,

properties in excess of Rs. 6000 Crores are attached;

(vii) NSEL is only obligated to recover the money from the defaulters. It

has secured decrees/arbitral awards to the tune of Rs. 3,397 Crores

from the members. The Bombay High Court has accepted the

determination of liability of Rs. 136.98 Crores against defaulters by

the Committee appointed by it. The Committee has crystallised a

further liability of Rs. 760 Crores from the defaulters which is

pending acceptance by the Bombay High Court;

(viii) NSEL has filed proceedings for execution of the decrees and

awards against the defaulters across five States. Since the process

is taking time, NSEL instituted a petition

22

before this Court under

Article 32 seeking a consolidation of all execution proceedings;

(ix) NSEL did not receive any ‗deposit‘, as defined under Section 2(c) of

the MPID Act since:

(a) The impugned notifications by which the property of the

respondent was attached under Section 4 of the MPID Act

22

WP (C) No. 995 of 2019

PART B

22

proceed only on the basis that NSEL accepted money which it

failed to return and there is no reference to a deposit founded on

the acceptance of commodities;

(b) The Government cannot improve on the reasons by a

subsequent affidavit (Relied on Mohinder Singh Gill v. CEC

23

);

and

(c) According to the definition of ‗deposit‘ under Section 2(c) of the

MPID Act, only the deposit of ‗valuable‘ commodity is covered. In

common parlance, valuable commodities would be restricted to

gold, silver, or other precious metals. NSEL only traded in

agricultural commodities and steel. Agricultural commodities are

not covered by the definition.

(x) The traders who participated on NSEL‘s platform are corporate

traders. The statement of objects and reasons of the MPID Act

states that the Act is for the protection of ‗small‘ depositors;

(xi) The proceeding under the MPID Act would short-circuit the trials in

the pending civil suits against both NSEL and 63 Moons. 63 Moons

is a public listed company with more than 50,000 shareholders, 800

employees and 2 million users. If the property of 63 Moons is

attached, the interest of stakeholders will be prejudiced; and

(xii) NSEL did not have control over any monies received from the

traders. NSEL is a pass through platform, where the money was

sent to the counter party brokers on the same day.

23

(1978) 1 SCC 405

PART B

23

15 Mr. Mukul Rohatgi, Senior Counsel, appearing for the respondent made

the following submissions:

(i) NSEL runs a commodity exchange, similar to a stock exchange.

NSEL is only a transacting medium and neither collects ‗deposits‘

nor does it assure returns;

(ii) NSEL receives a commission of Rs. 100 per one lakh of the trade

value (0.1%) from the traders;

(iii) In Bhaskaran, (supra) this Court held that the Tamil Nadu

Protection of Interests of Depositors (in Financial Establishments)

Act 1997

24

is constitutionally valid. In paragraph 15 of the judgment,

the court observed that though the Tamil Nadu Act and MPID have

minor differences, the view taken in the judgment would equally

apply to the validity of the MPID Act. This Court rejected the

challenge on the ground of Articles 14, 19 and 21 without examining

the provisions of the statute. Therefore, the Court in the present

case is not precluded from examining the constitutional validity of

the provisions of the MPID Act;

(iv) Section 4 of the MPID Act is arbitrary and constitutionally invalid and

it suffers from over-breadth since:

(a) Sub-section (1) of Section 4 mandates the attachment of

property of the ‗promoter, director, partner, manager or member

of the said Financial Establishment.‘;

24

―Tamil Nadu Act”

PART B

24

(b) Sub-section (2) of Section 4 divests the title of the attached

properties without due process of law; and

(c) Section 7 states that the Designated Court shall issue a notice to

the financial establishment or any other person whose property is

attached. An objection shall be raised by all persons who are

likely to have a claim. The objection shall be decided by a

summary procedure under Order 37 of CPC 1908. The

divestment of title of a property by a summary procedure is

arbitrary.

(v) Though the transaction by NSEL in its platform seems to be an

exchange of commodities on paper, it was an agreement between a

lender and borrower. A borrower who has defaulted in paying the loan

can be held liable to repay it;

(vi) The forensic audit traces back the money trail to the borrowing-

traders and not to NSEL;

(vii) Five of the six attachment notifications were ―omnibus notifications‖

issued by an incompetent authority; and

(viii) NSEL did not make a blanket assurance of 16% returns. The

representations only meant that investors making ‗wise investments‘

would get an annualised return of 16%.

PART C

25

C. Analysis

C. 1 Framework of the MPID Act

16 The MPID Act was enacted by the legislature in Maharashtra and received

the assent of the President on 21 January 2000. The Statement of Objects and

Reasons accompanying the introduction of the Bill states that the statute is

enacted to protect the public from the increasing menace of financial

establishments grabbing money from the public in the form of deposits:

―There is a mushroom growth of Financial Establishments

in the State of Maharashtra in the recent past. The sole

object of these Establishments is of grabbing money

received as deposits from public, mostly middle class and

poor on the promises of unprecedented high attractive

interest rates of interest or rewards and without any

obligation to refund the deposit to the investors on

maturity or without any provision for ensuring rendering of

the services in kind in return, as assured. Many of these

Financial Establishments have defaulted to return the

deposits to public. As such deposits run into crores of

rupees, it has resulted in great public resentment and

uproar, creating law and order problem in the State of

Maharashtra, especially in the city like Mumbai which is

treated as the financial capital of India. It is, therefore,

expedient to a make a suitable legislation in the public

interest to curb the unscrupulous activities of such

Financial Establishments in the State of Maharashtra.‖

17 Section 3 of the MPID Act envisages punishment upon conviction of every

person including a promotor, partner, director, manager or employee responsible

for the management of or the conduct of the business or affairs of the financial

establishment which has fraudulently defaulted in the repayment of deposits on

maturity. Section 3 is in the following terms:

―Any Financial Establishment, which fraudulently defaults

any repayment of deposit on maturity along with any

benefit in the form of interest, bonus, profit or in any other

from as promised or fraudulently fails to render service as

assured against the deposit, every person including the

PART C

26

promoter, partner, director, manager or any other person

or an employee responsible for the management of or

conducting of the business or affairs of such Financial

Establishment shall, on conviction, be punished with

imprisonment for a term which may extend to six years

and with fine which may extend to one lac of rupees and

such Financial Establishment also shall be liable for a fine

which may extend to six years and with fine which may

extend to one lac of rupees and such Financial

Establishment also shall be liable for a fine which may

extend to one lac of rupees.

Explanation- For the purpose of this section, a Financial

Establishment, which commits default in repayment of

such deposit with such benefits in the form of interest,

bonus, profit or in any other form as promised or fails to

render any specified service promised against such

deposit with an intention of causing wrongful gain to one

person or wrongful loss to another person or commits

such default due to its inability arising out of impracticable

or commercially not viable promises made while accepting

such deposit or arising out of deployment of money or

assets acquired out of the deposits in such a manner as it

involves inherent risk in recovering the same when

needed shall, be deemed to have committed a default or

failed to render the specific service, fraudulently.‖

Section 4 contemplates the levy of attachment on properties of a financial

establishment on default of return of payment. Section 4 provides that if on a

complaint received from the depositors or otherwise, the Government is satisfied

that any financial establishment has failed to return the deposit on maturity or

demand, or to pay interest or an assured benefit, or has failed to provide a

service that was assured against the deposit, or if the Government has reason to

believe that any financial establishment is acting in a manner detrimental to the

interest of the depositors with the intention to defraud them, it may attach the

money or property acquired by the financial establishment out of the deposit. The

provision states that if such money or property is not available to be attached, the

PART C

27

property of the financial establishment or the promoter, director, partner, manager

or member may be attached.

18 Section 5 provides for the appointment of a Competent Authority while

Section 6 contains a provision for a Designated Court. Section 7 enunciates the

powers of the Designated Court regarding attachment. Under Section 7, upon

receipt of an application under Section 5, the Designated Court shall issue a

show cause notice to the financial establishment or any person whose property is

attached on why the order of attachment should not be made. A notice shall also

be issued to all persons who are likely to have an interest in the property, calling

them to submit objections to the attachment of the property on the ground that

they have an interest in the property or a portion of it. If no cause is shown, then

the attachment shall be made absolute and directions can be issued for the

realisation and equitable distribution of assets. If cause is shown, the Designated

Court shall investigate into it by following a summary procedure as contemplated

under Order 37 of the Civil Procedure Code 1908. An appeal against an order of

the Designated Court is envisaged by the provisions of Section 11.

19 Since NSEL did not have sufficient money or property for attachment

under Section 4 on default of payment of the outstanding amounts, the State of

Maharashtra attached the properties of the respondent which owns 99.9% of the

shares of NSEL.

C. 2 Framework of NSE

20 It is necessary to refer to the bye-laws of NSEL to ascertain the structure

of NSEL‘s operation and functioning. Bye-law 2.17 defines ―certified warehouse

receipt‖ in the following terms:

PART C

28

―Certified Warehouse receipt means a receipt issued

under the authority of the Exchange or any agency

approved by the exchange as a certified warehouse,

evidencing proof of ownership of a standard quantity of

commodities of a stated grade and quality by the

beneficial owner or holder of the certified warehouse

receipt. Certified warehouse receipt may either be in

physical form or in dematerialised/electronic form as may

be permitted by law.‖

The expression ‗certified warehouse‘ is defined in Bye-law 2.18 as a ―warehouse

approved and designated by the Exchange for making deliveries to and taking

deliveries for fulfilling contractual obligations resulting from transaction in

commodities.‖ Bye-law 2.51 defines ‗Margin‘ as follows:

―Margin means a deposit or payment of cash/other

specified assets/documents to establish or maintain

a position in a commodity and include initial margin,

special margin, ordinary margin, delivery period margin,

additional margin and variation margin or any other type

of margin as may be determined by the Exchange from

time to time.‖

(emphasis supplied)

21 The expression ‗warehouse receipt‘ is defined in Bye-law 2.96 to mean a

document evidencing that a commodity is being held in the approved warehouse.

Bye-law 3.7 provides for limitation of liability:

―The Exchange shall not be liable for any activities of its

members or of any other person, authorised or

unauthorised, acting in the name of any member, and

any act of commission or omission by any one of them,

either singly or jointly, at any time shall not be in any way

construed to be an act of commission or omission by any

one of them, as an agent of the Exchange. Save as

otherwise specifically provided in these Bye-Laws and in

the Business Rules and Regulations of the Exchange, the

Exchange shall not incur or shall not be deemed to have

incurred any liability and accordingly, no claim or

recourse shall lie against the Exchange, any member of

the Board of Directors/or committee duly appointed by it

or any other authorised person acting for an on behalf of

the Exchange, in respect of or in relation to any

transaction entered into through the exchange made by

PART C

29

its members and any other matters connected therewith o

related thereto, which are undertaken for promoting,

facilitating, assisting, regulating, or otherwise managing

the affairs of the Exchange to achieve its objects as

defined in the Memorandum and Articles of Association

of the Exchange.‖

22 Bye-law 4.20(a) states that all outstanding transactions in commodities

shall be compulsorily delivered at one or more delivery points or in warehouses

accredited to the Exchange. Clause (b) of the bye-law states that if the

outstanding transactions have not been settled by giving or receiving deliveries,

then it shall be auctioned by buying-in or selling-out as per the Business Rules of

the Exchange:

(a) All outstanding transactions in commodities shall in

general be for compulsory delivery at any one or

more delivery points and/or warehouses approved,

certified and designated by the Exchange.

(b) All outstanding positions not settled by giving or

receiving deliveries shall be auctioned by way of

buying-in or selling-out as per the Business Rules of

the Exchange, together with a penalty as prescribed

by a Managing Director or such committee for those

failing to give or receive delivery.

Bye-Law 7.10.2 states that the Exchange shall be responsible for its

commitments to each clearing member unless the cause for default was under

improper trades not covered by the Settlement Guarantee Fund:

―The Exchange shall be responsible for its commitments

to each clearing member whether the remaining clearing

members with whom it has dealings have defaulted

except under circumstances where improper trades not

covered under the Settlement Guarantee Fund (SGF) are

the cause for default…‖

PART C

30

Bye-law 7.11 states that the Clearing House of the Exchange shall, among other

things, have the responsibility of receiving margin payments, certification of

warehouse receipts, and transmission of documents. Bye-law 7.11 reads as

follows:

―The Clearing House of the Exchange shall, in the

manner specified by the Relevant Committee or the

relevant authority, have the responsibility of receiving

and maintaining margin payments, monitoring open

positions and margins, and transmis sion of

documents, payments and certified warehouse

receipts amongst the trading-cum- clearing members

and institutional clearing members of the Exchange.‖

(emphasis supplied)

Bye-law 9 provides for clearing and settlement. Bye-laws 9.5, 9.6 and 9.7 provide

as follows:

―9.5 An order to buy or sell will become a matched

transaction only when it is matched in the Trading

system and the Clearing House does not find the order to

be invalid on any other consideration and further after

verifying that the following are in agreement and/or in

order:

( i) Commodity,

(ii) price indices,

(iii) Quantity,

(iv) Transaction quote,

(emphasis supplied)

9.6 Once a trade is matched and marked to market by the

Clearing House, the Exchange shall be substituted as

counter party for all net financial liabilities of the

clearing members in specified commodities in which

the Exchange has decided to accept the responsibility

of guaranteeing the financial obligations.

(emphasis supplied)

9.7 All outstanding transactions shall be binding upon the

original contracting parties, that is, the members of the

Exchange until issue of delivery notice or delivery order or

payment for delivery, as the case may be.‖

PART C

31

23 Bye-law 10 contains provisions with regard to delivery:

―10.1 For the fulfilment of outstanding position, commodity

shall be tendered by Delivery Orders through the

respective Clearing Members to the Clearing House in

such manner as may be prescribed in the Business Rules

or Regulations.

10.2 The Exchange shall prescribe tender days and

delivery period for each commodity during which sellers

having outstanding sale position must issue Delivery

Orders through their respective Clearing Members to the

Clearing House.

10.3 The Clearing House shall allocate the delivery orders

received by it amongst one or more buyers having

outstanding long open positions in a manner as

considered appropriate by the Relevant Authority.

10.4 The Relevant Authority may specify in advance

before commencement of trading in a commodity various

grades of a commodity that may be tendered and the

discounts and premiums for such grades.

10.5 All positions outstanding at the end ·of the day shall

result into compulsory delivery obligation at the closing

rate of the date of transaction as fixed by the Relevant

Authority. The differences arising out of the actual

transaction price and closing price shall be received from

and disbursed to amongst the members on the next day

of trading, pending actual delivery. The Relevant Authority

may prescribe penalty on sellers with outstanding

positions who fail to issue delivery orders and the

Exchange may conduct auction to ensure delivery to the

buyers who hold outstanding buy positions and intended

to lift delivery and could not receive Delivery Orders

against such positions due to failure on the part of the

seller. In case of non availability of commodities during

the auction process, close-out process as defined in the

business rule shall be applicable. The Relevant Authority

may prescribe penalty on buyers with outstanding

positions who fail to pay against his purchase obligation

and the Exchange may conduct sale out auction to ensure

that the sellers gets the price for the commodities

delivered against their sale obligation and could not

receive payment due to failure on the part of the buyers.

In case of non availability of suitable buyers during the

auction process, close-out process as defined in the

business rule shall be applicable. Failure to pay the dues

and penalties relating to such closing out within the

stipulated period shall cause the member to be declared

as defaulter and render him liable for disciplinary action.‖

PART C

32

24 Bye-law 10.7 envisages that a seller issuing the delivery order shall

receive from the Clearing House the full price of the commodity delivered as per

the delivery order rate, subject to additions or deductions on account of premium

or discounts prescribed under the bye-laws. Under bye-law 10.8, a buyer has to

pay to the Clearing House, the value of delivery allocated on his account by the

Exchange within the time specified. However, the money will be passed by the

Clearing House to the seller only on the completion of the delivery process to the

satisfaction of the Exchange. The bye-law reads as follows:

―10.8 A buyer shall pay to the Clearing House the value

of delivery allocated on his account by the Exchange

within such time as may be specified, by the Exchange.

After getting full price of delivery from the buyer as per

delivery order allocated to him, the Exchange will

endorse the delivery order to him. Thereafter, till

completion of the delivery process, the money will be

retained by the Clearing House and will be passed on

to the seller only on completion of the delivery

process to the satisfaction of the Exchange. The

Clearing House will pass on the proceeds to the

seller after making adjustments relating to quality,

quantity and freight factors, as the case may be. The

balance amount, if any, remaining after such

adjustments, will be passed on to or recovered from the

buyer by the Clearing House.‖

(emphasis supplied)

Bye-law 10.11 provides that at the time of issuing the delivery order, the seller of

the commodity must satisfy the clearing member that he owns and holds in his

possession or his agent‘s possession adequate stocks of the required quantity

and quality of the commodity. Bye-law 10.12 prescribes that:

―A seller member is entitled to offer delivery only at

the delivery centers specified by the Exchange in

advance for the respective commodity. Delivery can be

tendered at such specified centers strictly as per the

delivery procedure specified by the Exchange. Before

tendering delivery, the seller is also required to obtain a

certificate from a surveyor empanelled by the Exchange

PART C

33

and such certificate shall be accompanied with the

delivery order being tendered by him to the Clearing

House. The surveyor's certificate shall clearly specify the

quality of the goods tendered and shall also confirm that

such quality is tenderable as per the contract specification

of the Exchange. In case of non-compliance of any of

these conditions, the delivery order is rejected ab

initio.”

(emphasis supplied)

25 Thus, under the above bye-law, the selling member is entitled to offer

delivery only at the delivery centre which is specified in the Exchange strictly in

accordance with the delivery procedure provided before tendering delivery. The

seller has to obtain a surveyor‘s certificate which is to be accompanied with the

delivery order being tendered by him to the Clearing House. Bye-laws 10.14,

10.15 and 10.16 contain the following stipulations:

―10.14 Members of the Exchange and the clie nts/

constituents dealing through them shall strictly abide by

the delivery procedure, methods of sampling, survey,

transportation, storage, packing, weighing and final

settlement procedures, as may be specified by the

Relevant Authority from time to time. Any violation of such

method will be dealt with by the Relevant Authority in the

manner, as may be specified from time to time.

10.15 A seller of commodity shall deliver the quantity as

per his net sale position in the commodity during the

period specified ·in the Rules, Business Rules and

Regulations of the Exchange and notices and orders

issued thereunder from time to time for the specified

commodity, which should confirm to the quality specified

by the Exchange in the contract specification. In case of

any failure to do so, such net sale position shall be closed

out by buying in auction and the seller shall be required to

pay the difference, as determined by the Clearing House

and penalty in addition thereto.

10.16 A buyer shall be required to lift delivery from the

specified warehouse within the period prescribed by the

Relevant Authority, as per the delivery order assigned to

him. In case of his failure to do so, he shall be required to

pay the warehouse charges, insurance charges and other

expenses relating to storage for the incremental period

and also a penalty in addition thereto.‖

PART C

34

26 Bye-law 12 contains provisions for a Settlement Guarantee Fund. The

Settlement Guarantee Fund is constituted by deposits made by the members of

the Exchange and is utilised for paying in the event of a default in payments by

the trading members, paying insurance covers and covering the losses of the

Exchange, among other uses. Bye-law 12.1.1 is in the following terms:

―12.1 The Exchange to maintain Settlement Guarantee

Fund

12.1.1 The Exchange shall maintain Settlement

Guarantee Fund in respect of different commodity

segments of the Exchange for such purposes, as may be

prescribed by the Relevant Authority from time to time.‖

27 Bye-Law 12.1.2 states that the relevant authority may prescribe from time

to time, the norms and conditions governing Settlement Guarantee which may

among other things specify the amount of deposit or contribution to be made by

each trading member to the Settlement Guarantee Fund. The bye-law also states

that rules are to be made on contributions, conditions of repayment and

withdrawal of contribution from the fund among other stipulations. Bye law 12.1.3

states that the minimum amount in the fund before starting the trading must be

Rs 1 Crore, which can be suitably increased. Bye Law 12.2 stipulates the

contribution and deposit with the Settlement Guarantee Fund:

―12.2 Contribution to and Deposits with Settlement

Guarantee Fund

12.2.1 Each member shall be required to contribute to

and provide a minimum security deposit, as may be

determined by the Relevant Authority from time to time,

to the relevant Settlement Guarantee Fund. The

Settlement Guarantee Fund shall be held by the

Exchange. The money in the Settlement Guarantee Fund

shall be applied in the manner, as may be provided in

these Bye-laws, Rules, Business Rules and Regulations

of the Exchange and notices and orders issued

thereunder from time to time.

PART C

35

12.2.2 The Relevant Authority may specify the amount of

additional contribution or deposit to be made by each

member and/or category of clearing members, which

may, inter alia, include the minimum amount to be

provided by each clearing member.

12.2.3 The Exchange shall, as a result of multi-lateral

netting followed by it in respect of settlement of

transactions, guarantee financial settlement of such

transactions to the extent it has acted as a legal counter

party, as may be provided in the relevant Bye-laws from

time to time.

12.2.4. The total amount of security deposit and

additional deposit, maintained by a clearing member with

the Clearing House of the exchange, in any form as

specified herein, shall form part of the Settlement

Guarantee Fund.

12.2.5 The amount deposited by a clearing member

towards the security deposit shall be refundable, subject

to such terms and conditions as may be specified by the

Relevant Authority from time to time. Any amount

deposited or paid by the clearing member may be

refunded provided further that such amount is in

surplus and there is no actual/cryt allized or

contingent liability or a claim from any client or

clearing bank to be discharged by the clearing

member.

(emphasis supplied)

28 Bye-law 12.3 stipulates that a member may provide a deposit in the form of

cash, fixed deposit receipts, bank guarantees or in such other form.

12.3 Form of Contribution or Deposit

The Relevant Authority may, in its discretion, permit a

member to contribute to or provide the deposit to be

maintained with the Settlement Guarantee Fund, in the

form of either cash, fixed deposit receipts, bank

Guarantees or in such other form or method and subject

to such terms and conditions, as may be specified by the

relevant Authority from time to time.

PART C

36

Bye-law 12.4 states that the deposit may be replaced by fresh deposits. Bye-law

12.5 states that the Settlement Guarantee Fund may be invested in securities or

other avenues of investment:

12.4 Replacement of Deposit

By giving a suitable notice to the Exchange and subject

to such conditions, as may be specified by the Relevant

Authority from time to time, a member may withdraw fixed

deposit receipts or bank Guarantees given to the

Exchange, representing the member‘s contribution or

deposit towards the Settlement Guarantee Fund,

provided that the member has, simultaneously with such

withdrawal, deposited cash, fixed deposit receipts, or

bank Guarantees with the Clearing House or the

Exchange or made contribution through such other mode,

as may be approved by the Clearing House or the

Exchange from time to time, to meet his required

contribution or deposit, except as provided in these Bye-

Laws.

12.5 Investment of Settlement Guarantee Fund

Funds in the Settlement Guarantee Fund may be

invested in such approved securities and/or other

avenues of investments, as may be provided for by

the Board in the relevant Business Rules and

Regulations in force from time to time.

(emphasis supplied)

Bye-law 12.6 states that the Settlement Guarantee Fund may be used for the

purpose of (i) maintenance of the fund; (ii) using the fund temporarily to fulfil the

shortfalls and deficiencies arising from clearing and settlement obligations; (iii)

payment of insurance cover; (iv) covering the loss arising from clearing and

settlement obligations; and (v) repaying to the members, the balance amount

available after utilization.

―12.6 Administration and Utilization of Settlement

Guarantee Fund

12.6.1 The Settlement Guarantee Fund may be utilised

for such purposes as may be provided in these Bye-Laws

and Regulations and subject to such conditions as the

PART C

37

relevant Authority may prescribe from time to time, which

may include

a. defraying the expenses of creation and maintenance of

Settlement Guarantee Fund;

b. temporary application of Settlement Guarantee Fund to

meet shortfalls and deficiencies arising out of the clearing

and settlement obligations of clearing members in

respect of such transactions, as may be provided in these

Bye-Laws, Rules, Business Rules and Regulations of the

Exchange in force from time to time;

c. payment of premium on insurance cover(s) which the

Relevant Authority may take from time to time, and/or for

creating a Default Reserve Fund by transferring a

specified amount every year, as may be decided by the

Relevant Authority from time to time;

d. Meeting any loss or liability of the Exchange arising out

of clearing and settlement operations of such transaction,

as may be provided in these Bye-Laws, Rules, Business

Rules and Regulations of the Exchange in force from

time to time;

e. repayment of the balance amount to the member

pursuant to the provisions regarding the repayment of

deposit after meeting all obligations under Bye-Laws,

Rules, Business Rules and Regulations of the Exchange,

when such member ceases to be member, and

f. any other purpose, as may be specified by the Relevant

Authority, from time to time.‖

29 Bye-laws 12.7 and 12.8 specifically provide for utilization of the fund for the

failure of the trading member to meet his settlement obligations or when he is

declared as a defaulter:

“12.7 Utilization for failure to Meet Obligations

Whenever a member fails to meet his settlement

obligations to the Exchange arising out of his clearing

and settlement operations in respect of his transaction,

as may be provided in these Bye-Laws, Rules and

Regulations of the Exchange, the Relevant Authority may

utilise the Settlement Guarantee fund and other moneys

lying to the credit of the said member to the extent

necessary to fulfil his obligations under such terms and

PART C

38

conditions, as the Relevant Authority may specify from

time to time;

12.8 Utilisation in Case of Failure to Meet Settlement

Obligations or on Declaration of Defaulter

Whenever a member fails to meet his settlement

obligation to the Exchange arising out of the transactions,

as may be provided in these Bye-laws, Rules, Business

Rules and Regulations of the Exchange in force from

time to time, or whenever a member is declared a

defaulter, the Relevant Authority may utilise the

Settlement Guarantee Fund and other moneys of the

member to the extent necessary to fulfil his obligations in

the following order:

[…]

12.9.2 If the cumulative amount under all the above

heads is not sufficient, the balance obligations shall be

assessed against all the clearing members in the same

proportion as their total contribution and deposit towards

security deposit, and the clearing members shall be

required to contribute or deposit the deficient amount in

the Settlement Guarantee Fund within such time, as the

Relevant Authority may specify in this behalf from time to

time.‖

[…]

Bye-law 12.11 states that the deposit shall be allocated by the Exchange among

various segments of trading:

12.11 Allocation of the Contribution or Deposit

Each clearing member‘s contribution and deposit towards

the Settlement Guarantee Fund shall be allocated by the

Exchange among the various segments of trading,

which are designated as such by the exchange and in

which the member may participate, in such

proportion as the Exchange may decide from time to

time. The Exchange shall retain the rights to utilise the

fund allocated to a particular segment of trading to match

the losses or liabilities of the Exchange, incidental to the

operation for that segment or for any other segment, as

may be decided by the Exchange at his discretion.

PART C

39

Bye-law 12.12 states that the clearing member shall be repaid his deposit after

making deductions:

12.12 Repayment to the Clearing Member on His

Cessation

12.12.1 A members hall be entitled to repayment of the

actual amount of deposit, if any, made by him to the

Settlement Guarantee Fund provided it is not part of the

admission fee after

a. the member ceases to be an exchange member on

account of any reason whatsoever,

b. all pending transactions at the time the member

ceases to be an exchange member, which may result in a

charge to the settlement Guarantee Fund, have been

closed and settled,

c. all obligations to the Exchange for which the member

was responsible while he was an exchange member

have been satisfied, or at the discretion of the Relevant

Authority, have been deducted by the Exchange from the

member‘s actual deposit; provided, the member has

presented to the Exchange such indemnified or

guarantees as the Relevant Authority may deem

necessary or another clearing member has been

substituted owning liability for all the transaction and

obligations of the clearing member, who had ceased to

be a member.

d. a suitable amount, as may be determined by the

Relevant Authority at his discretion, has been set aside

for taking care of any loss/liability/obligation arising out of

his past transactions and

e. a suitable amount, as may be determined by the

Relevant Authority at its discretion, has been set aside by

the Exchange towards such other obligations, as may be

perceived by the Exchange to exist or be perceived by

the Exchange to arise in future.

12.12.2 The Relevant Authority may specify norms for

repayment of deposit including the manner, amount and

period within which it may be paid. The repayment

amount, at no point of time, will exceed the actual deposit

available to the credit of the clearing member after

deducting the necessary dues or charges payable by

such clearing member from time to time, including the

initial deposit.

PART C

40

C. 3 Definitions of „Deposit‟ and „Financial Establishment‟: Interpretation of

Sections 2(c) and 2(d) of the MPID Act

30 The notifications attaching the properties of the respondent were issued

under Section 4 of the MPID Act. Section 4 covers only those situations where a

‗financial establishment‘ is a defaulting entity. Section 4 is reproduced below:

“4. (1) Notwithstanding anything contained in any other

law for the time being in force,-

(i) where upon complaints received from the depositors

or otherwise, the Government is satisfied that any

Financial Establishment has failed,-

(a) to return the deposit after maturity or on

demand by the depositor; or

(b) to pay interest or other assured benefit; or

(c) to provide the service promised against such

deposit; or

(ii) where the Government has reason to believe that

any Financial Establishment is acting in a calculated

manner detrimental to the interest of the depositors with

an intention to defraud them;

[…]

(emphasis supplied)

31 The primary issue is whether NSEL is a ‗financial establishment‘ within the

meaning of Section 2(d). Section 2(d) reads as follows:

―(d) ―Financial Establishment‖ means any person

accepting deposit under any scheme or arrangement or

in any other manner but does not include a corporation or

a co-operative society owned or controlled by any State

Government or the Central Government or a banking

company as defined under clause (c) of section 5 of the

Banking Regulation Act, 1949;

Financial Establishment is defined as any person accepting a ‗deposit‘. The

definition excludes from its purview (a) a corporation or cooperative society

controlled or owned either by the State or the Central Government; and (b) a

Banking Company as defined under Section 5(c) of the Banking Regulation Act

PART C

41

1949. Since NSEL does not fall within any of the exceptions, it would be a

‗financial establishment‘ for the purposes of the Act if it is a ‗person accepting

deposit‘. Section 3(42) of the General Clauses Act 1897 provides an inclusive

definition of ―person‖ to include both incorporated and unincorporated

companies

25

as:

― ‗person‘ shall include any company or association or

body of individuals, whether incorporated or not.‖

The expression deposit is defined in Section 2(c) of the MPID Act in the following

terms:

―(c) ―deposit‖ includes and shall be deemed always to

have included any receipt of money or acceptance of any

valuable commodity by any Financial Establishment to be

returned after a specified period or otherwise, either in

cash or in kind or in the form of a specified service with or

without any benefit in the form of interest, bonus, profit or

in any other form, but does not include–

(i) amount raised by way of share capital or by way

of debenture, bond or any other instrument covered

under the guidelines given, and regulations made, by the

SEBI, established under the Securities and Exchange

Board of India Act, 1992;

(ii) amounts contributed as capital by partners of a

firm;

(iii) amounts received from a scheduled bank r a co-

operative bank or any other banking company as defined

in clause (c) of section 5 of the Banking Regulation Act,

1949;

(iv) any amount received from, -

(a) the Industrial Development Bank of India,

(b) a State Financial Corporation,

(c) any financial institution specified in or under section 6A of

the Industrial Development Bank of India Act, 1964, or

(d) any other institution that may be specified by the

Government in this behalf;

(v) amounts received in the ordinary course of

business by way of, -

(a) security deposit,

(b) dealership deposit,

(c) earnest money,

(d) advance against order for goods or services;

25

New Horizon Sugar Mills Limited v. Government of Pondicherry, (2912) 10 SCC 575 (para 58)

PART C

42

(vi) any amount received from an individual or a firm or an

association of individuals not being a body corporate,

registered under any enactment relating to money

lending which is for the time being force in the State; and

(vii) any amount received by way of subscriptions in respect

of a Chit.

Explanation I. – ―Chit‖ has the meaning as assigned to it

in clause (b) of section 2 of the Chit Funds Act, 1982;

Explanation II. – Any credit given by a seller to a buyer on

the sale of any property (whether movable or immovable)

shall not be deemed to be deposit for the purposes of this

clause;

The statutory definition of the expression ‗deposit‘ comprises of the following

ingredients:

(i) Any receipt of money or the acceptance of a valuable commodity by a

financial establishment;

(ii) Such acceptance ought to be subject to the money or commodity being

required to be returned after a specified period or otherwise; and

(iii) The return of the money or commodity may be in cash, kind or in the form

of a specified service, with or without any benefit in the form of interest,

bonus, profit or in any other form.

These elements of the definition are followed by specific exclusions contemplated

in clauses (i) to (vii). Clause (i) of the exceptions covers an amount which is

raised by way of share capital or by debenture, bond or other instrument

governed by the guidelines and regulations of SEBI. Clause (v) states that money

received in the ordinary course of business by way of security deposit, dealership

deposit, earnest money or advance against an order of goods or services shall be

excluded. The exclusions in clause (i) to (vii) indicate that transactions which

would otherwise fall within the broad sweep of the definition are excluded.

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43

32 The legislature may define a word artificially by restricting or expanding its

natural meaning. When the legislature employs the phrase ‗means‘, the definition

is intended to be exhaustive. In Indra Sarma v. VKV Sarma,

26

this Court

observed that the definition of the expression ‗domestic relationship‘ in Section

2(f) of the Protection of Women from Domestic Violence Act 2005 is restrictive

since it is defined by the use of the term ‗means‘. On the other hand, the Court

has taken a consistent view that where the definition of a word is inclusive, as

presaged by the adoption of the expression ―includes,‖ it is prima facie

extensive

27

. The definition of ‗deposit‘ uses the phrase ‗includes and shall be

deemed to have always included‘. The import of this is to create a legal fiction by

which actions which though not included within the natural meaning of the

expression are intended to be included. The combined use of ‗includes‘ and

‗deemed to have always included‘ while defining the term ‗deposit‘ makes the

term inclusive and not restrictive.

33 The expression ‗deposit‘ is conspicuously broad in its width and ambit for it

includes, not only any receipt of money but also the acceptance of any valuable

commodity by a financial establishment under any scheme or arrangement. As a

matter of interest, we may note at this stage that the expression ―any‖ is used in

the substantive part of the definition of the expression ‗deposit‘ on five occasions

namely;

(i) Any receipt of money;

(ii) Any valuable commodities;

(iii) By any financial establishment;

26

(2013) 15 SCC 755

27

Karnataka Power Transmission Corporation v. Ashok Iron Work Pvt. Ltd., (2009) 3 SCC 240; Ramanlal Bhailal

Patel v. State of Gujarat, (2008) 5 SCC 449

PART C

44

(iv) With or without any benefit; and

(v) In any other form.

34 Likewise, the definition of financial establishment refers to the acceptance

of deposits:

(i) Under any scheme or arrangement; or

(ii) In any other manner.

35 The repeated use of the expression ‗any‘ by the statute while defining both

the above expressions is a clear reflection of the legislative intent to cast the net

of the regulatory provisions of the law in a broad and comprehensive manner.

Unlike many other state enactments which govern the field, clause (c) of Section

2 of the MPID Act comprehends within the meaning of a deposit not only the

receipt of money but of any valuable commodity as well. For example, in contrast,

Section 2(2) of the Tamil Nadu Act defines ‗deposit‘ only in terms of money and

not commodity. Section 2(2) reads as follows:

―(2) ―deposit‖ means the deposit of money either in one lump

sum or by instalments made with the Financial Establishments

for a fixed period, for interest or for return in any kind or for any

service;

Similarly, statutes protecting the interest of depositors in Orissa

28

, Kerala

29

,

Himachal Pradesh

30

, Goa

31

, Telangana

32

, Andhra Pradesh

33

and Sikkim

34

define

the phrase ‗deposit‘ only in terms of money and not the acceptance of a

commodity.

28

The Odisha Protection of Interests of Depositors (in Financial Establishments) Act 2011

29

The Kerala Protection of Interests of Depositors in Financial Establishment Act 2013

30

The Himachal Pradesh [Protection of interests of depositors (in Financial Establishments)] Act 1999

31

The Goa Protection of Interests of Depositors (in financial Establishments) Act 1999

32

The Telangana Protection of Depositors of Financial Establishments Act 1999

33

The Andhra Pradesh Protection of Depositors of Financial Establishments Act 1999

34

The Sikkim Protection of interests of Depositors (in Financial Establishments) Act 2000

PART C

45

36 According to the second ingredient of Section 2(c), the money or

commodity must be liable to be returned. However, such return need not

necessarily be in the form of cash or kind but also in the form of a service, with or

without any benefit such as interest. It needs to be recalled that clause (v) of

Section 2(c) states that a deposit of money or commodity made as a security

deposit, dealership deposit or an advance amount is excluded from the definition

of the phrase ‗deposit‘. To illustrate, if a member of a financial establishment

deposits Rs. 25,000, and that money is returned on cessation of membership by

making deductions, the issue of whether the deposit is a security deposit or of the

nature covered under Section 2(c) should be determined with reference to the

structure of operation and functioning of the financial establishment. It is to be

noted that the definition also states that the return may be with or without interest

or any benefit. Therefore, the submissions made by both the sides on whether

NSEL had through its representations assured a 16% return on trading in the

platform is immaterial for the purpose of determining if NSEL accepted deposits.

37 Having referred to the relevant bye-laws, we shall determine if NSEL

receives ‗deposits‘ as defined by Section 2(c) of the MPID Act. The bye-laws

elucidate that NSEL receives both money and commodities from trading

members. In order to decide if these receipts by NSEL could be regarded as

‗deposits‘, the test of ‗return‘ will have to be satisfied. The test is that the return be

in cash, kind or service. It is not necessary that the return should be with the

benefit of interest, bonus or profit. Therefore, if the financial establishment is

obligated to return the deposit without any increments, it shall still fall within the

purview of Section 2(c) of the MPID Act, provided that the deposit does not fall

PART C

46

within any of the exceptions. The exception of relevance to our case is clause (v)

which states that ‗amounts received in the ordinary course of business by way of

(a) security deposit; (b) dealership deposit; (c) earnest money; and (d) advance

against order for goods or services shall be excluded from the purview of the

term ‗deposit‘.

C. 3.1 Settlement Guarantee Fund: Deposit under Section 2(c) of the MPID

Act

38 The trading members pay NSEL a margin deposit and NSEL maintains a

Settlement Guarantee Fund. Regulation 4.12 states that only transactions of

those members who have paid the margin deposit and security deposit shall be

considered as valid. Therefore, the payment of margin deposit and security

deposit is ‗mandatory‘ for a person to trade on NSEL‘s platform. Regulation 4.12

refers to the SGF as a ‗security deposit‘. Similarly, bye-law 12.2.1 stipulates that

each member shall contribute a ‗minimum security deposit‘. However, merely

because the SGF is referred to as a ‗security deposit‘, the exception would not

automatically be applicable. The meaning of the phrase ‗security deposit‘ takes

colour from the surrounding phrases. Clause (v) to sub-Section 2(c) excludes

security deposit, dealership deposit, earnest money, and an advance against an

order for goods and services from the ambit of the phrase ‗deposit‘. The concepts

used in sub-Section 2(c) (v) fall in two categories: (i) token amounts paid to

indicate the earnest to purchase (earnest money and advance money), and (ii)

payments required to meet exigent situations of default by a party (dealership

deposit and security deposit).

PART C

47

39 Black‘s Law dictionary

35

defines security deposit as ―money deposited by a

tenant with a landlord as security for full and faithful performance by the tenant of

terms of leases, including damages to premises. It is refundable unless the

tenant has caused damage or injury to the property or has breached the terms of

tenancy or the laws governing the tenancy. Certain states also require the

landlord to make a security deposit to cover essential repairs required on rental

property.‖ A similar phrase, ―Client Security Fund‖ is defined as a fund set up by

many State Bar Associations to cover losses incurred by persons as a result of

dishonest conduct of member-attorneys. The meanings of both these phrases

suggest the necessary ingredients of a security deposit, which are:

(i) An advance to ensure faithful performance of the contract;

(ii) A payment to cover essential ‗functions‘ for performance; and

(iii) The entitlement to refund being dependent upon whether damage, injury

and default are occasioned.

40 Chapter 12 of the bye-laws provides the features of the SGF:

(i) SGF is utilized for:

(a) defraying the expenses for its creation and maintenance ;

(b) temporary use of the fund to meet efficiencies arising out of the

performance of obligations;

(c) payment of premia on insurance covers;

(d) payments for the loss or liability of the Exchange arising out of

‗clearing and settlement operations‘;

(e) repayment of the balance deposit to a member;

35

Bryan A Garner, Black’s Law Dictionary (11 ed. Thomson Reuters).

PART C

48

(f) payment towards the member‘s obligations where the member fails

to meet his settlement obligations; and

(g) payment of the member‘s obligation on being declared as a

defaulter;

(ii) The members‘ contribution is allocated among various segments of

trading, in which they can participate. The Exchange also retains the

right to utilise the fund allotted to a particular segment of trading to

match the losses or the liabilities of the Exchange; and

(iii) The settlement fund may be invested in approved securities or other

avenues of investments.

41 The features of the SGF indicate that the fund is used to cover those

expenses, which are beyond the utilization which is made out of a regular

security fund. Unlike a security deposit between a landlord and a tenant where

the fund is used to meet the ‗essential obligations‘ of the landlord such as repair

work and deductions are made when the tenant has outstanding payments,

NSEL uses the deposit to cover the payment obligations of the trading member

(buyer) to another trading member (seller) since NSEL is a counter party to the

transactions. However, NSEL uses the fund to cover functions beyond its role as

a counter-party. For example, the fund is used to cover loses faced by the NSEL

in the settlement operations, investments are made in securities, and the fund is

allotted in various segments of trading, where the funds are also utilised to cover

loses, if any, in the segment. Therefore, these three features of the SGF indicate

that though the SGF is termed as a ‗security deposit‘ in nomenclature, its features

do not represent a security deposit. Since NSEL receives ‗money‘ in the form of

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49

SGF that is returned in money and services, and is not covered by the

exceptions, it would fall within the expression ‗deposit‘ as defined in Section 2(c)

of the Act.

C. 3. 2 Receipt of commodities: Deposit under Section 2(c) of the Act

42 A person who wishes to trade in the platform of NSEL is required to place

the commodities in the accredited warehouse of NSEL. NSEL would then provide

the trader with a warehouse receipt. When the buyer‘s offer and the seller‘s offer

is matched, NSEL would debit the amount from the buyer member‘s pay in

obligations and it would be credited to NSEL‘s exchange settlement account. The

Operations Department would confirm with the Delivery Department if the

requisite quantity of a particular commodity of the seller is available. After such

confirmation, the Operations Department would release the purchase price to the

selling broker‘s designated bank account. Simultaneously, a Delivery Allocation

Report would be issued to the buyer‘s broker or the buyer. Once the VAT invoice

is paid, NSEL would issue a Delivery Note authorizing the Buyer to take delivery

from the designated warehouse or if the buyer chooses, he can take constructive

possession of the commodity. There is nothing in the definition of the term

‗deposit‘ to mean that the acceptance of the commodity should be accompanied

by a transfer of title to the commodity. Even if the financial establishment is only

in ‗custody‘ of the commodity, it would still fall within the purview of the phrase

‗acceptance of commodity‘. On the acceptance of custody of the commodity,

NSEL has to provide various services such as an obligation to keep the

commodity safe and without any damages. Add itionally, the Operations

Department and the Delivery Department will have to coordinate while matching

PART C

50

the contracts. Similarly, after the delivery note is sent to the buyer, the commodity

is either delivered to the buyer or the buyer is put in constructive possession of

the commodity. The phrase ‗warehouse receipt‘ is defined in Bye-law 2.96 as a

document evidencing that the commodity is being held by NSEL in the approved

warehouse. Clause (b) to Bye law 4.20 states that if the outstanding transactions

have not been settled by giving or receiving deliveries, then it (the commodity)

shall be auctioned by buying-in or selling-out as per the Business Rules of the

Exchange. Bye-law 10.11 states that the commodities shall be delivered to and

delivery taken from only the designated warehouses. Therefore, NSEL offers a

multitude of ‗services‘ in return for receiving the commodity. The receipt of the

commodities and holding the commodities (when the members are put in

constructive possession) in the accredited warehouses is a ‗deposit‘ under

Section 2(c) of the Act.

43 The counsel for the respondent argued that the expression ‗valuable

commodity‘ used in Section 2(c) would only include precious metals such as gold

and silver. The expression ―valuable commodity‖ is not defined by the statute.

There is no valid basis to accept the submission of the respondent that the

expression should only comprehend within it precious metals such as gold and

silver. If the legislature intended to so restrict the definition of the expression

valuable commodity, it could have used an explanation importing an artificial

meaning to the expression. However, the legislature has desisted from doing so.

A valuable commodity is a commodity which has significant value. This does not

refer only to the intrinsic value of the commodity. Whether or not a commodity is

valuable has to be determined bearing in mind the salutary object and purpose of

PART C

51

the Act which is to protect the interest of depositors. It is in this context that it

becomes necessary to adopt a purposive construction which would give effect to

the meaning and content of the law. Any attempt to read the definition in a

restrictive sense would be contrary to legislative intent. The intent of the

legislature is to define the expression ‗deposit‘ as well as the expression ‗financial

establishment‘ in a comprehensive and all-encompassing manner. Therefore, the

phrase ‗valuable commodity‘ cannot be restricted to only mean precious metals.

Agricultural commodities which NSEL trades in will fall within the purview of the

term.

44 Though it has been observed earlier that it is not necessary that there must

be interest or an assured benefit from the deposit for the purposes of Section 2(c)

of the MPID Act, it is still necessary that we refer to the representations made by

NSEL. NSEL in the course of its brochures has held out representations about

the trading and investment opportunities available for:

(a) corporate clients;

(b) high net worth individuals; and

(c) retail investors.

45 Under the head of ‗contract specifications‘, the following representation

has been held out:

Commodity Duration Investment (lacs.) Yield

Castor Seed T+3 & T+36 7.5 -9 Lacs 16%

Castor Oil T+5 & T+30 7-9 16%

Cotton Wash Oil T+2 & T+25 10 16%

Paddy T+2 & T+25 3.5-4.5 16%

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52

Steel T+2 & T+25 4.5-5 16%

Raw Wool T+2 & T+25 3.5-4 16%

Wool Top T+2 & T+25 1.8-2 16%

Crude Soybean

Oil

T+2 & T+25 3.3.-3.5 16%

Soya DOC T+2 & T+25 1.7-2.0 16%

Refined Mustard

Oil

T+2 & T+25 6.5 16%

Refined Soybean

Oil

T+2 & T+25 6.5 16%

Refined

Sunflower Oil

T+2 & T+25 6.5 16%

RBD Palmolein

Oil

T+2 & T+25 6.5 16%

Sugar T+2 & T+25 3.0 16%

Maize T+2 & T+25 3.0 16%

The above representation specifies:

(i) Commodities;

(ii) Duration of trades;

(iii) Investment; and

(iv) Yield.

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53

For example, in the case of castor seeds, NSEL held out a buy contract (T+3)

and sale contract (T+36), in which the yield is stated to be 16%. Moreover, NSEL

represented that:

―Opportunities

 Traders can trade and lock their return

 Trader has to buy in near settlement contract and sell in

far settlement contract simultaneously

 Price for both settlement available

 Exchange provides counterparty guarantee risk

 No basis risk, No link with future contracts‖

While describing the features of ―trading opportunity‖, NSEL represented that:

“Features of Trading Opportunity:

 T+2 and T+25contract offers unique trading

opportunity to traders

 Trader purchases T+2 contract and simultaneously

sells T+25 contract

 Pay-in obligation is on T+2 while Pay-out of the funds

will be on T+25. Entire settlement cycle is of 35-37

days

 Price differential between the two settlement dates i.e

premium if annualized offers interest rate of about

16%

 Income arising out of such trades are treated as

Business Income‖

While comparing the investment opportunities of bank fixed deposits with trading

opportunities at NSEL, NSEL represented that:

―Comparison

 Bank FD 9.25% for 390 days; NSEL Trading Opportunity

16%;

 Bank FD minimum duration 390 days; NSEL Trade

duration 35-55 days, depending on the contract

 Traders have an option of rolling over their position as

per their convenience‖

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54

Under the caption of ‗risk management‘, the following representation has been

held out by NSEL:

“Risk Management

 Trades are backed by collaterals in the form of stock

 Cash margin of 10-15% is levied on the open position of

seller in T+2/T+3 contracts

 In case of adverse price movement, Exchange collects

additional margin from the seller in T+2/T+3 contracts

 The exchange has defined guidelines for auction/closeout

(circular: 029/2008)

 Warehouse Management includes Selection,

Accreditation, Quality Resting, Fumigation and

Insurance‖

The above representation indicates that paired contracts were designed as a

unique trading opportunity by NSEL under which a trader would, for instance,

purchase a T+2 contract (with a pay-in obligation on T+2) and would

simultaneously sell a T+25 contract (with a pay-out of funds on T+25). The

price differential between the two settlement dates was represented to offer an

annualized return of about 16%. NSEL categorically represented that all trades

were backed by collaterals in the form of stocks and its management activities

included selection, accreditation, quality testing, fumigation and insurance.

Therefore, NSEL represented that on receiving money and commodities, the

members would receive ‗assured returns‘ and a ‗service‘. Though NSEL has

been receiving ‗deposits‘, it has failed to provide services as promised against the

deposits and has failed return the deposits on demand. Therefore, the State of

Maharashtra was justified in issuing the attachment notifications under Section 4

of the MPID Act.

PART C

55

C.4 Uncovering the Conspiracy

C. 4.1 The Grant Thornton Report

46 FMC engaged Grant Thornton LLP to conduct a forensic audit of the

practices and records of NSEL. The report found several instances where NSEL

had repeatedly contravened the rules:

(a) NSEL allowed members who had repeatedly defaulted to continue trading

though under NSEL‘s exchange rules, a member who does not have

sufficient collateral to discharge his obligations would not be allowed to

trade further;

(b) Members who were in default or those who had exhausted their margin

limits, were granted an exemption from margin requirements;

(c) There was an insufficient collateral of commodities in the warehouses and

NSEL did not diligently conduct the exercise;

(d) The Bye-laws and rules of the Exchange mandate the formation of various

committees for the effective management of operations. However, the

Board failed to constitute nine out of ten such committees. There is also no

documentary evidence to demonstrate whether any committee formed

was ever convened;

(e) Client margin deposits and the settlement fund were used for fulfilling the

obligations of the defaulting members. NSEL also used the deposits made

by the members for its own business purposes on a regular basis. For

example, on 28 March 2013, Rs. 236.5 Crore was withdrawn from the

settlement fund to fund NSEL‘s business overdraft account. There is a

PART C

56

running deficit in the client settlement fund balance from 2012 to June

2013. The financial team had raised the issue on multiple occasions;

(f) Mr. Jignesh Shah, in his presentation dated 10 July 2013 to FMA had

stated that 120 NSEL accredited warehouses held commodities valued at

Rs. 6,000 crores. However, there was no documentation relating to

warehouse activities for long term trades indicating that the contracts were

not secured by stocks. The collateral of the members was not in custody

and NSEL did not have any control over it;

(g) Though the Warehouse Development and Regulatory Authority had

rejected NSEL‘s application for registration of its warehouse in May 2011,

the website of the establishment still represented that the warehouses

were registered with the authority;

(h) Though the warehouse receipts are to evidence that a commodity is held

in an approved warehouse, receipts were issued without deposit of the

commodities. NSEL did not insist on commodities being deposited in the

warehouses prior to executing the sale transactions. NSEL issued Delivery

Allocation Reports misrepresenting that every transaction was delivery

based and backed with commodities;

C. 4. 2 63 Moons Judgment

47 NSEL filed third party representations in a suit filed by the allegedly duped

traders for the recovery of Rs 5,600 Crores from the 24 defaulters. Arbitration

proceedings were also initiated for the recovery of dues. An amount of Rs. 3,365

Crores out of Rs 5,000 crores has been covered through Court decrees and

arbitral awards. On 6 January 2014, the EOW, Mumbai filed a charge sheet

PART C

57

against the Managing Director and CEO of NSEL, the head of warehousing, and

two other defaulters. It was mentioned in the charge sheet that these employees

of NSEL had colluded with the defaulters to enable them to trade on the platform

without depositing the goods in the accredited warehouses. FMC wrote to the

Union of India on 18 August 2014 that NSEL and 63 Moons be merged. In the

representative suit which was instituted, the Bombay High Court appointed a

three-member committee consisting of Mr Justice VC Daga, Mr J Solomon, and

Mr Yogesh Thar for determining the liability of the defaulters and assisting in the

process of recovery. In addition to Rs. 3,365 Crores covered through court

decrees and arbitral awards, the high level committee had crystallised a further

sum of Rs. 835.88 to be recovered from the defaulters.

48 On 15 October 2014, the Additional Secretary, Department of Economic

Affairs wrote a letter to the Ministry of Corporate Affairs stating that 63 Moons

and NSEL are maintaining separate identities to deprive the investors of money.

It was stated that the corporate veil ought to be lifted and both the companies

must be amalgamated to recover the pending dues. On 12 February 2016, an

amalgamation order under Section 396(3) was passed, merging the assets and

liabilities of 63 Moons and NSEL. A writ petition filed under Article 226 for

challenging the amalgamation was dismissed by the Bombay High Court. A

Special Leave Petition before this court challenged the judgment of the Bombay

High Court. The two-Judge Bench in the course of determining the validity of the

amalgamation order, referred to the Grant Thornton report, where the features

and representations made regarding the twin contracts ( short term and long

term), and the role of NSEL in the default of payments were discussed:

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58

―1.3. These long-term contracts (e.g. T+25) were first

traded on the NSEL exchange in September 2009. The

Board of NSEL ratified the circulars introducing such

long-term contracts over a period beginning November

2009.

1.4. Further evidence was obtained with regard to the

existence of a financing business, such as presentations

which stated that a fixed rate of return was

guaranteed on investing in certain products on the

NSEL exchange.

Several internal (NSEL) presentations were found,

upon a review of email databases, setting out a yield

(e.g. 16%) as an opportunity for investors for trading

in certain products on the NSEL exchange.

An external presentation was also obtained which

had been made by a brokerage house (Geojit Comtrade

Ltd.) for their clients claiming a fixed return on

investments made on the NSEL exchange. Further, this

presentation, declared that actual delivery of stocks in

such transactions would not be required.

1.5. Grant Thornton also obtained evidence of

repeated contraventions of NSEL exchange rules and

bye-laws which facilitated such financing

transactions to continue and grow in size as below:

Repeated defaults : As per the NSEL exchange rules

a member who does not have sufficient collateral/monies,

etc. to discharge his obligations would not be allowed to

trade further. This rule was overridden on a recurring

basis. Further despite repeated defaults members were

allowed to trade and increase their expenses. For

example, Lotus Refineries had defaulted, as per the

Rules of the Exchange, on 198 days between the fifteen-

month period of 1-4-2012 and 30-7-2013.

Exemptions from margin requirements : Members

who were in a default position or who had exhausted their

margin limits on trading were granted an exemption from

margin requirements and thus allowed them to increase

their exposure by engaging in new trades. More than

1800 margin limit exemptions were granted between

2009 through to 2013.

Inadequate monitoring of member collateral : NSEL

did not carry out any diligence to establish the existence

of stock at member managed warehouses, upon which

trades were being executed. Grant Thornton carried out a

stock verification exercise and found significant shortages

vis-à-vis expected collateral.‖

The judgment referred to the findings of misutilization of client monies/ settlement

fund in the Grant Thornton report:

―1.12. Misutilisation of client monies/settlement fund :

As per the rules and bye-laws of the NSEL exchange

―Margin deposits received by clearing members from their

constituent members and clients in any forms shall be

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59

accounted for and maintained separately in segregated

accounts and shall be used solely for the benefit of the

respective constituent members' and client position.‖

Grant Thornton found evidence (including emails)

that client monies/settlement fund, was used

regularly for fulfilling the obligations of defaulting

members.

Further, NSEL utilised client monies/settlement

fund for its own business purposes on a regular

basis. For example, on 28-3-2013, Rs 236.5 crores was

withdrawn from the Settlement Fund in order to fund

NSEL's own business overdraft account.

There was a running deficit in the clie nt

monies/settlement fund balance from April 2012 to June

2013. The finance team of FTIL had raised this as an

area of concern on several occasions.‖

The report‘s finding on the lack of documentation of the warehousing activities

were discussed in the judgment:

―The report then goes on to say that there was no

documentation in relation to warehouse activities for long-

term trades indicating that such contracts were not

secured by warehouse stocks. The warehouses were

customer managed warehouses and the underlying

collateral were not in custody of NSEL. NSEL did not

have control over these warehouses and Grant Thornton

was denied access to a number of warehouses. The

Warehouse Development and Regulatory Authority had

in fact rejected NSEL's application for registration of its

warehouses way back on 16-5-2011. Notwithstanding

such rejection, NSEL's website represented that its

warehouses were registered with the Authority. No

verification or due diligence was ever undertaken by

NSEL to ensure compliance by its members of the

conditions outlined in its rules and bye-laws even though

in terms of NSEL bye-laws, warehouse receipt issued by

NSEL were meant to evidence a commodity being held in

an approved warehouse. NSEL did not insist upon

deposit of commodities in the warehouses prior to

executing sale transactions. Instead NSEL resorted to

issuing Delivery Allocation Reports (DAR) representing to

genuine investors that each transaction was delivery

based and backed at the time of sale by the required

quantity of commodities in its warehouses.‖

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60

The conclusion in the FMC order dated 17.12.2013 which revealed the

conspiracy unfolded by 63 Moons and NSEL was also referred to in the following

extract:

―15.1. Noticee 1: Financial Technologies (India) Ltd.

(FTIL) : We have discussed the equity structure of NSEL,

which is wholly owned by FTIL. We have also pointed out

that Shri Jignesh Shah, Chairman -cum-Managing

Director of FTIL has been a Director on the Board and

also functioning as Vice-Chairman and a key

management person of NSEL since its inception.

Similarly, Shri Joseph Massey and Shri Shreekant

Javalgekar have been Directors of the said company

from its very beginning till the settlement crisis at NSEL

first came to light in July 2013. The facts establishing the

fraud involving a settlement default over Rs 5500 crores

at NSEL have been discussed at length in the SCNs

issued to the noticees as well as reiterated, albeit

illustratively by us at para 14.7 of this Order. The

responsibility of FTIL as the holding company possessing

absolute control over the governance of NSEL has also

been highlighted. The control of FTIL over NSEL

becomes further crystallised from the responses given by

M/s Grant Thornton before the Commission on 3-12-2013

stating that Shri Jignesh Shah, Mr Joseph Massey and a

host of other officials of FTIL reviewed the forensic audit

report and it was only after obtaining their clearance, the

forensic auditor finalised its report.

15.1.1. The violation of conditions prescribed in the

exemption notification, trading in paired contracts to

generate assured financial returns under the garb of

commodity trading, admission of members who were

thinly capitalised having poor net worth and giving margin

exemptions to those who were repeatedly defaulting in

settling their dues, poor warehousing facilities with no or

inadequate stocks, no risk management practices

followed, non-provision of funds in SGF, consciously

appointing Shri Mukesh P. Shah as statutory auditors for

FY 2012-13 who was related to Shri Jignesh Shah, and

apparent complicity with the defaulters to defraud the

investors, etc., lead to an inescapable conclusion that a

huge fraud was perpetrated by NSEL while having the

presence of two Board members of FTIL on the Board of

NSEL, one of whom was th e Vice-Chairman of the

company.

15.1.2. The facts of the case and the manner in which

the business affairs of NSEL were conducted leaves no

doubt in our minds that FTIL, notwithstanding its

contentions that it was ignorant of the affairs and conduct

of NSEL, exerted a dominant influence on the

management, and directed, controlled and supervised the

governance of NSEL. In the face of a fraud of such a

magnitude involving settlement crises of Rs 5500 crores

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61

owed to over 13,000 sellers/investors on the trading

platform of NSEL, FTIL, cannot seek to take refuge

behind the corporate veil so as to unjustifiably isolate

itself from the fraudulent actions that took place at NSEL

resulting in such a huge payment crisis.

15.1.3. FTIL has its principal business of

development of software which has become the

technology platform for almost the entire industry

engaged in broking in shares and securities,

commodities, foreign exchange, etc. As has been

demonstrated by FTIL in their written submission, FTIL

has floated a number of regulated exchanges—both for

securities and commodities derivatives—in India as well

as abroad. NSEL was incorporated to provide a trading

platform of commodity spot exchange on a pan-India

basis for the purpose of which apparently it sought and

was granted exemption from the operation of the FCRA,

1952. Since the objective of the NSEL was promoting

spot trading in commodities on an electronic

platform, its business model did not contemplate

venturing into trading in forward contracts. FTIL had

already promoted MCX, a regulated exchange under

FCRA, 1952, for the purpose of trading in forward

contracts. Therefore, having secured an exemption from

the purview of FCRA, 1952 on the ground that it was

intended to promote spot trading, NSEL was not

authorised to allow trading in forward contracts through

the scheme of paired contracts, thereby defying

conditions stipulated in the exemption notification granted

to it. The motive behind allowing trading in forward

contracts on the NSEL platform in a circuitous manner on

NSEL which was neither recognised nor registered under

FCRA, 1952 indicates mala fide intention on the part of

the promoter of FTIL to use the trading platform of its

subsidiary company for illicit gains away from the eyes of

Regulator. The fact that FTIL promoted NSEL sought

exemption from FCRA, 1952 provisions even before they

had started any trading or operation, points to their

intention from the outset. In this manner, it misinterpreted

the conditions stipulated in the exemption notification in

collusion with a handful of members, which ultimately

culminated in a massive fraud involving Rs 5500 crores,

which has the potential effect of eroding trust and

confidence in exchanges and financial markets.

15.1.4. Keeping in view the foregoing observations

and the facts which reveal misconduct, lack of integrity

and unfair practices on the part of FTIL in planning,

directing and controlling the activities of its subsidiary

company, NSEL, we conclude that FTIL, as the anchor

investor in the Multi-Commodity Exchange Ltd. (MCX)

does not carry a good reputation and character, record of

fairness, integrity or honesty to continue to be a

shareholder of the aforesaid regulated

exchange. Therefore, in the public interest and in the

interest of the Commodities Derivatives Market which is

regulated under FCRA, 1952, the Commission holds that

Financial Technologies (India) Ltd. (FTIL) is not a “fit and

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62

proper person” to continue to be a shareholder of 2% or

more of the paid-up equity capital of MCX as prescribed

under the guidelines issued by the Government of India

for capital structure of commodity exchanges post 5

years of operation. It is further ordered that neither FTIL,

nor any company/entity controlled by it, either directly or

indirectly, shall hold any shares in any

association/Exchange recognised by the Government or

registered by the FMC in excess of the threshold limit of

the total paid-up equity capital of such

Association/Exchange as prescribed under th e

commodity exchange guidelines and post 5 -year

guidelines.‖

(emphasis supplied)

49 The two-Judge Bench of this Court took note of the modus operandi

through which the trading members were duped by a conspiracy hatched by a

few trading members along with NSEL. However, this Court held that the order

amalgamating NSEL and 63 Moons did not fulfil the requirements of Section 396

of the Companies Act 1956 as the ‗essentiality‘ aspect in Section 396 was not

satisfied since the ‗emergency situation‘ requiring amalgamation was short lived.

Further, it was observed that the rationale for the amalgamation was the financial

incapability of NSEL to effect recoveries from the defaulting members. The Court

noted that the final order of amalgamation dated 12 February 2016 referred to the

actions taken for recovery by the EOW and the Enforcement Directorate which

indicated methods other than amalgamation through which the monies could be

recovered. The action taken by the EOW and the Enforcement Directorate is

referred to in the following extract:

―92.1. What is important to note is that by the time the

final order of amalgamation was passed i.e. on 12-2-

2016, the final order itself records:

―8.1. Economic Offences Wing, Mumbai:

(i) Total amount due and recoverable from 24

defaulters is Rs 5689.95 crores.

(ii) Injunctions against assets of defaulters worth Rs

4400.10 crores have been obtained.

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63

(iii) Decrees worth Rs 1233.02 crores have been

obtained against 5 defaulters.

(iv) Assets worth Rs 5444.31 crores belonging to the

defaulters have been attached of which assets worth Rs

4654.62 crores have been published in Gazette under the

MPID Act for liquidation under the supervision of MPID

Court and balance assets worth Rs 789.69 crores have

been attached/secured for attachment by the EOW.

(v) Assets worth Rs 885.32 crores belonging to the

Directors and employees of NSEL have been attached

out of which assets worth Rs 882.32 crores have already

been published in Gazette under the MPID Act for

liquidation under the supervision of the MPID Court and

balance assets worth Rs 3 crores have been

attached/secured for attachment by the EOW.

(vi) MPID Court has already issued notices under

Sections 4 & 5 of the MPID Act to the persons whose

assets have been attached as above. Thus, the process

of liquidation of the attached assets has started.

(vii) The Bombay High Court has appointed a 3-

member committee headed by Mr Justice (Retd.) V.C.

Daga and 2 experts in finance and law to recover and

monetise the assets of the defaulters.

(viii) Rs 558.83 crores have been recovered so far,

out of which Rs 379.83 crores have been

received/recovered from the defaulters and Rs 179

crores were disbursed by NSEL to small

traders/investors.

8.2. Enforcement Directorate:

(i) ED has traced proceeds of crime amounting to Rs

3973.83 crores to the 25 defaulters;

(ii) ED has attached assets worth Rs 837.01 crores

belonging to 12 defaulters;

(iii) As per the recent amendment in the PMLA, the

assets attached by ED can be used for restitution to the

victims.

8.3. The above status indicates that the said

enforcement agencies are working as per their

mandate….‖

(emphasis supplied)

This Court noted that the ‗essentiality‘ requirement in Section 396 of the

Companies Act was not fulfilled:

―92.2. What concerned the FMC in August 2014 has, by

the date of the final amalgamation order, been largely

redressed without amalgamation. The ―emergency

situation‖ of 2013 which, even according to the Central

Government, required the emergent step of compulsory

amalgamation has, by the time of the passing of the

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64

Central Government order, disappeared. Thus, the raison

d'être for applying Section 396 of the Companies Act has,

by the passage of time, itself disappeared. In fact, as on

today, decrees/awards worth INR 3365 crores have been

obtained against the defaulters, with INR 835.88 crores

crystallised by the committee set up by the High Court,

pending acceptance by the High Court, even without

using the financial resources of FTIL as an amalgamated

company. What is, therefore, important to note is that

what was emergent, and therefore, essential, even

according to the FMC and the Government in 2013-2014,

has been largely redressed in 2016, by the time the

amalgamation order was made. Also, the Central

Government order does not apply its mind to the

essentiality aspect of Section 396 at all. In fact, in several

places, it refers to ―essential public interest‖ as if

―essential‖ goes with ―public interest‖ instead of being a

separate and distinct condition precedent to the exercise

of power under Section 396. On facts, therefore, it is

clear that the essentiality test, which is the condition

precedent to the applicability of Section 396, cannot be

said to have been satisfied.‖

The judgment held that NSEL had falsely represented that it had full stock as

collateral and that the stock was valued at Rs. 6,000 crores:

―91.3. We have seen that neither FTIL nor NSEL has

denied the fact that paired contracts in commodities were

going on, and by April to July 2013, 99% (and excluding

E-series contracts), at least 46% of the turnover of NSEL

was made up of such paired contracts. There is no doubt

that such paired contracts were, in fact, financing

transactions which were distinct from sale and purchase

transactions in commodities and were, thus, in breach of

both the exemptions granted to NSEL, and the FCRA.

We have also seen that NSEL throughout kept

representing that it was, in fact, a commodity exchange

dealing with spot deliveries. Apart from the Grant

Thornton Report and the FMC order, we have also seen

that Shri Jignesh Shah, on 10 -7-2013, made

representations to the DCA and the FMC, in which he

stated that NSEL had full stock as collateral; 10-20% of

open position as margin money; and that the stock

currently held in NSEL's 120 warehouses was valued at

INR 6000 crores, all of which turned out to be incorrect.

Further, there is no doubt whatsoever that in July 2013,

as a result of NSEL stopping trading on its exchange, a

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65

payment crisis of approximately INR 5600 crores arose.

The further question that remains is whether, given these

facts, the conditions precedent for the applicability of

Section 396 were followed.

50 This Court in its decision in 63 Moons (supra) took note of the modus

operandi by which the defaults came about, specifically highlighting the role of

NSEL in not complying with the rules. It set aside the amalgamation order on the

narrow ground that the pre-conditions for the exercise of power under Section

396 had not been fulfilled. One of the reasons which persuaded this Court to set

aside the order of amalgamation was that the EOW and the Enforcement

Directorate had already taken steps to realise the amounts in default. The

judgment in 63 Moons (supra) has after a detailed analysis of the Grant Thornton

report and the FMC‘s order held that the defaulters and NSEL conspired to dupe

the members of their money.

C. 5 Constitutional Validity of the MPID Act

51 The respondents challenged the constitutional validity of the provisions of

the MPID Act before the High Court on the ground that it is arbitrary. The High

Court in the impugned judgment did not deal with the constitutional validity of the

provisions and left the question open. The respondents contended before this

Court that the judgment in Bhaskaran (supra) while holding the Tamil Nadu Act

to be constitutionally valid only made a passing reference to the MPID Act. Thus,

it was argued that this Bench is not bound by the judgment in Bhaskaran (supra)

while deciding on the validity of the provisions of the MPID Act.

PART C

66

52 A Full Bench of the Bombay High Court had held that the state legislature

did not possess the legislative competence to enact the MPID Act.

36

On the other

hand, a Full Bench of the Madras High Court had upheld the constitutional

validity of the Tamil Nadu Act. The correctness of the judgment of the Madras

High Court was assailed before this Court in Bhaskaran (supra). The judgment

of the Full Bench of the Bombay High Court was cited and considered by the two

judge Bench which heard the appeal against the judgment of the Madras High

Court. This Court held that the state legislature does possess legislative

competence to enact the law in question and that the legislation was not for the

transaction of banking or the acceptance of deposits but for the protection of the

depositors who are deceived by fraudulent financial establishments. The Court

held:

―26. The Tamil Nadu Act was enacted to ameliorate the

conditions of thousands of depositors who had fallen into

the clutches of fraudulent financial establishments who

had raised hopes of high rate of interest and thus duped

the depositors. Thus the Tamil Nadu Act is not focused on

the transaction of banking or the acceptance of deposit,

but is focused on remedying the situation of the

depositors who were deceived by the fraudulent financial

establishments. The impugned Tamil Nadu Act was

intended to deal with neither the banks which do the

business or banking and are governed by the Reserve

Bank of India Act and the Banking Regulation Act, nor the

non-banking financial companies enacted under the

Companies Act, 1956.

27. The Reserve Bank of India Act, the Banking

Regulation Act and the Companies Act do not occupy the

field which the impugned Tamil Nadu Act occupies,

though the latter may incidentally trench upon the former.

The main object of the Tamil Nadu Act is to provide a

solution to wipe out the tears of several lakhs of

depositors to realise their dues effectively and speedily

from the fraudulent financial establishments which duped

them or their vendees, without dragging them in a legal

battle from pillar to post. Hence, the decision of this Court

36

Vijay C. Puljal v. State of Maharashtra, (2005) 4 CTC 705 (Bom)

PART C

67

in Delhi Cloth Mills [(1983) 4 SCC 166] has no bearing on

the constitutional validity of the Tamil Nadu Act.‖

The judgment of the Full Bench of the Bombay High Court in Vijay C. Puljal v.

State of Maharashtra

37

was specifically disapproved in the decision of this Court

in Bhaskaran (supra), where the Court held:

―14. The learned counsel for the appellant relied on the

Full Bench decision of the Bombay High Court in Vijay C.

Puljal case [(2005) 4 CTC 705 (Bom)] in support of his

contention that the Tamil Nadu Act, like the Maharashtra

Act, was unconstitutional being beyond the legislative

competence of the State Legislature. We do not agree.

15. We have carefully perused the judgment of the Full

Bench of the Bombay High Court in Vijay case [(2005) 4

CTC 705 (Bom)] and we respectfully disagree with the

view taken by the Bombay High Court. It may be noted

that though there are some differences between the

Tamil Nadu Act and the Maharashtra Act, they are

minor differences, and hence the view we are taking

herein will also apply in relation to the Maharashtra

Act.”

(emphasis supplied)

53 Besides holding that the State legislature did not lack legislative

competence to enact the law, the judgment in Bhaskaran (supra) also concluded

that the Tamil Nadu enactment did not violate the provisions of Articles 14,

19(1)(g) or 21 of the Constitution. In that context, while dismissing the

constitutional challenge against the legislation enacted in Tamil Nadu, the Court

held:

―31. We fail to see how there is any violation of Articles

14, 19(1)(g) or 21 of the Constitution. The Act is a salutary

measure to remedy a great social evil. A systematic

conspiracy was effected by certain fraudulent financial

establishments which not only committed fraud on the

depositors, but also siphoned off or diverted the

depositor's funds mala fide. We are of the opinion that the

37

(2005) 4 CTC 705 (Bom)

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68

act of the financers in exploiting the depositors is a

notorious abuse of faith of the depositors who innocently

deposited their money with the former for higher rate of

interest. These depositors were often given a small pass

book as a token of acknowledgment of their deposit,

which they considered as a passport of their children for

higher education or wedding of their daughters or as a

policy of medical insurance in the case of most of the

aged depositors, but in reality in all cases it was an

unsecured promise executed on a waste paper. The

senior citizens above 80 years, senior citizens between 60

and 80 years, widows, handicapped, driven out by wards,

retired government servants and pensioners and persons

living below the poverty line constituted the bulk of the

depositors. Without the aid of the impugned Act, it would

have been impossible to recover their deposits and

interest thereon.

32. The conventional legal proceedings incurring huge

expenses of court fees, advocates' fees, apart from other

inconveniences involved and the long delay in disposal of

cases due to docket explosion in courts, would not have

made it possible for the depositors to recover their money,

leave alone the interest thereon. Hence, in our opinion the

impugned Act has rightly been enacted to enable the

depositors to recover their money speedily by taking

strong steps in this connection.

33. The State being the custodian of the welfare of the

citizens as parens patriae cannot be a silent spectator

without finding a solution for this malady. The financial

swindlers, who are nothing but cheats and charlatans

having no social responsibility, but only a lust for easy

money by making false promise of attractive returns for

the gullible investors, had to be dealt with strongly. The

small amounts collected from a substantial number of

individual depositors culminated into huge amounts of

money. These collections were diverted in the name of

third parties and finally one day the fraudulent financers

closed their financial establishments leaving the innocent

depositors in the lurch.‖

54 The judgment held that the Tamil Nadu Act is constitutionally valid and

constitutes a salutary measure which was long over-due to deal with these

matters. Significantly, the above extracts from the decision in Bhaskaran (supra)

indicate that the differences between the enactment in Tamil Nadu and

Maharashtra ―are minor‖ and the view of the court on the validity of the former will

govern the validity of the latter enactment as well.

PART C

69

55 The judgment in Bhaskaran (supra) was followed by another two-Judge

Bench of this Court in New Horizons Sugar Mills Limited v. Government of

Pondicherry

38

. The case arose from the action of the Government of

Pondicherry of attaching the properties acquired by a company. The validity of

the Pondicherry Protection of Interests of Depositors in Financial Establishments

Act 2004 was also in question. A two-Judge Bench of this Court considered

whether the pith and substance of the enactment istraceable to the entries in the

Union List or the State List of the Seventh Schedule to the Constitution. After

adverting to the earlier decision in Bhaskaran (supra) which upheld the Tamil

Nadu enactment while disapproving the Full Bench decision of the Bombay High

Court on the legislative competence of the State legislature to enact the MPID

Act, this Court held:

―50. In addition to the above, it has also to be noticed that

the objects for which the Tamil Nadu Act, the Maharashtra

Act and the Pondicherry Act were enacted, are identical,

namely, to protect the interests of small depositors from

fraud perpetrated on unsuspecting investors, who

entrusted their life savings to unscrupulous and fraudulent

persons and who ultimately betrayed their trust.

51. However, coming back to the constitutional

conundrum that has been presented on account of the

two views expressed, by the Madras High Court and the

Bombay High Court, it has to be considered as to which of

the two views would be more consistent with the

constitutional provisions. The task has been simplified to

some extent by the fact that subsequently the decision of

the Bombay High Court [(2005) 4 CTC 705 (Bom)]

declaring the Maharashtra Act to be ultra vires, has been

set aside by this Court [Sonal Hemant Joshi v. State of

Maharashtra, (2012) 10 SCC 601] , [ State of

Maharashtra v. Vijay C. Puljal, (2012) 10 SCC 599] , so

that there is now a parity between the judgments relating

to the Maharashtra Act and the Tamil Nadu Act.

[…]

38

(2012) 10 SCC 575

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70

59. […] The objects of the Tamil Nadu Act, the

Maharashtra Act and the Pondicherry Act being the same

and/or similar in nature, and since the validity of the Tamil

Nadu and Maharashtra Act have been upheld, the

decision of the Madras High Court in upholding the validity

of the Pondicherry Act must be affirmed. We have to keep

in mind, the beneficial nature o the three legislations

which is to protect the interests of all depositors, who

invest their life‘s earnings and savings in schemes for

making profit floated by unscrupulous individuals and

companies, both incorporated and unincorporated.‖

Following the decision in Bhaskaran (supra), the challenge to the Pondicherry

enactment on the ground of legislative competence was repelled.

56 The validity of the MPID Act was specifically dealt with in two decisions of

this Court in State of Maharashtra v. Vijay C. Puljal

39

and Sonal Hemant

Joshi v. State of Maharashtra

40

. In both the decisions, this Court upheld the

constitutional validity of the MPID Act in view of the earlier decision in Bhaskaran

(supra). In Soma Suresh Kumar v. Government of Andhra Pradesh

41

, a two

judge Bench of this Court upheld the provisions of the Andhra Pradesh Protection

of Depositors of Financial Establishments Act 1999 following the earlier decisions

in Bhaskaran (supra) and New Horizons Sugar Mills Limited (supra).

57 Having discussed the judgments of this Court on the constitutional validity

of the state legislations governing financial establishments offering deposit

schemes, including the MPID Act, there is no reason for us to reopen the

question. This Court has held that the MPID Act is constitutionally valid on the

grounds of legislative competence and when tested against the provisions of Part

III of the Constitution.

39

(2012) 10 SCC 599

40

(2012) 10 SCC 601

41

(2013) 10 SCC 677

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71

C. 6 The High Court‟s Judgment

58 Referring to the Bye-laws and rules of NSEL, the High Court held that

NSEL is an electronic trading platform which only facilitated transactions between

buyers and sellers. In this context, it observed that NSEL did not receive the pay-

in in its own right but only for the purpose of passing it on to the selling trading

member on the same day. The High Court observed:

―The nature of transaction to be carried out on the NSEL

platform was also therefore, in public domain since the

trading on this electronic platform commenced. The

business/transaction which operated through NSEL, do

not disclose any payin amount received by NSEL in its

own right but it was only received in the process of

settlement of the commodity trade and only for the

purpose of passing it on the selling trading member on

the same day. This amount cannot be said to be

received as a deposit within the meaning of Section 2(c)

of the MPID Act which contemplates ‗deposit‘ to be a

receipt of money or acceptance of a valuable commodity

on the promise that such money or valuable commodity

would be returned/repaid by the financial establishment

after a specified period or otherwise.‖

The High Court has lost sight of the fact that Section 2(c) of the MPID Act defines

‗deposit‘ in broad terms. Further, according to the definition, the return may be

either in money, commodity or service, and it is not necessary that the commodity

or the money must be returned in the same form. The definition includes the

receipt of money and the return of a commodity, or even the receipt of a

commodity and a return in the form of a service. Further, Bye-law 10.8 indicates

that NSEL was not merely an intermediary. The Bye-law states that the buyer

shall pay the Clearing House the value of the delivery allocation. However, till the

completion of the delivery process, the money will be retained by the Clearing

House of NSEL.

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72

59 Referring to the contract notes and the confirmation receipts generated on

the electronic platform, the High Court observed that NSEL was only a ‗medium‘.

However, the High Court subsequently noted that ‗something has gone wrong

somewhere in these transactions‘. Further, the High Court referred to the First

Information Report filed by Mr. Pankaj Saraf observing that even the complainant

had not stated that he had deposited any amount with NSEL. The Court goes on

to note:

―in no way, the complainant in the FIR allege a promised

return in the form of any interest, bonus, profit, but yield-

the difference in the price of a commodity between the

two trading dates i.e T+2 and T+30/33/25 was calculated

as a yield but this, in our view, would not fall within the

purview of deposit since neither the NSEL received the

commodities to be retained by itself nor did it receive any

amount to be deposited in its account.‖

60 The High Court also observed in paragraph 33 of the judgment that at the

most, only the sellers in T+2 (and buyers in T+25) could be referred to as a

‗financial establishment‘. This finding was made without analysing the functioning

of the exchange vis-à-vis Sections 2(c) and 2(d) of the Act. The Court also held

that the ‗warehouse receipts‘ do not establish the nature of the transaction that

took place in the platform. In this regard it observed:

―… this receipt do not provide an answer to the nature of

transaction that took place on the platform of NSEL and

though it is no doubt that the commodity came to be

accepted as a deposit, but it should be accepted with an

assured return and in the present case, the commodity

which was accepted was because it was to be sold to a

purchaser and it is not the case of the State that it was a

pure transaction where commodities are accepted as

deposit.‖

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The High Court observed that since transaction charges were charged by NSEL

and the amount paid by the buyer used to be paid by NSEL by the settlement

date, it is not a financial establishment.

61 The High Court has formed an erroneous opinion that firstly, only if the

return includes interest, bonus or any other added benefit, it would be a deposit

for the purpose of the MPID Act. However, Section 2(c) states that the return may

be ―with or without any benefit in the form of interest, bonus, profit or in any other

form‖. The definition does not stipulate that there must be an added benefit,

rather that the ‗added benefit‘ is irrelevant for the purpose of the definition;

secondly, that for the purpose of Section 2(c), the receipt of the commodity or

money ‗must be retained by itself‘. The definition does not provide any such

embargo. Rather, the definition is broadly worded to include even the possession

of the commodities for a limited purpose. The High Court has read the definition

of ‗deposit‘ narrowly without any reference to the salutary purpose of the MPID

Act.

62 The High Court also made observations on the merits of the criminal

proceedings. Referring to the role of NSEL in the default in payments, it observed

that at the highest, the actions of NSEL would constitute offences under Sections

465 and 467 of the IPC. The EOW filed a charge sheet under Section 173 CrPC

before the Sessions Judge, Special Court under the MPID Act for offences

punishable under Sections 409,465,467,468,471,474 and 477(4) read with

Section 120(B). The High Court ought not to have made observations on the

merits of the criminal proceedings when the writ petition was restricted to the

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issue of whether NSEL is a financial establishment for the purpose of the MPID

Act.

63 The High Court observed that the decision of this Court in 63 Moons

(supra) does not have ‗any serious effect on the present proceeding‘, though this

Court has discussed at length the modus operandi of NSEL in duping the trading

members by throwing light on the structure of the exchange. Though it was

observed that the question of constitutional validity was settled in Bhaskaran

(supra), New Horizons (supra), Sonal Hemant Joshi (supra) and Vijay Kulijal

(supra), the challenge of the respondent to the constitutional validity of the MPID

Act was still kept open by the High Court. Such an observation was made in spite

of noticing in paragraph 39 of the judgment that this Court in Bhaskaran (supra)

had observed that the MPID Act and the Tamil Nadu Act have minor differences

and that the statute did not violate Articles 14, 19(1)(g) or 21 of the Constitution.

64 Further, while referring to the earlier order of the Division Bench dated 1

October 2015, where it was prima facie recorded that NSEL is a ‗financial

establishment‘ for the purpose of the MPID Act, the High Court observed that it

was not bound by the prima facie view. The primary ground for the Division

Bench for arriving at a prima facie view was the representations made assuring a

14% to 16% yield. However, the High Court in its impugned judgment dispelled

the argument on the ground that only a ‗faint reference‘ was made to assured

returns. Such an observation misrepresents the factual instances which are

backed by documentary material.

65 The appellant also contended that the writ petition filed by the respondent

is not maintainable since there was an alternative remedy of raising an objection

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before the Designated Court under Section 7 of the MPID Act. Though there is

merit in the argument of the appellant, since the High Court decided on the

validity of the impugned attachment notifications on merits, and arguments have

been addressed in the present proceedings, we have proceeded to decide the

matter on merits.

66 For the reasons recorded in this judgment, we allow the appeals and set

aside the impugned judgment of the Bombay High Court dated 22 August 2019.

The impugned notifications issued under Section 4 of the MPID Act attaching the

properties of the respondent are valid.

67 Pending application(s), if any, stand disposed of.

…..…..…....…........……………….…........J.

[Dr Dhananjaya Y Chandrachud]

…..…..…....…........……………….…........J.

[Surya Kant]

…..…..…....…........……………….…........J.

[Bela M Trivedi]

New Delhi;

April 22, 2022